Download Report by the Committee on Comprehensive Financial Services for

Committee on
Comprehensive Financial
Services for Small
Businesses and Low
Income Households
Report
Table of Contents
Members‘ List and Terms of Reference
Signatures of CCFS Members
v
vii
Acknowledgements
List of Acronyms and Abbreviations
ix
xi
Section 1
Overview
Chapter 1.1
Chapter 1.2
Preface
Executive Summary and List of Recommendations
Section 2
Vision Statements and Design Principles
Chapter 2.1
Chapter 2.2
Vision Statements
Review of Current Status of Financial Inclusion and Financial
Deepening
Design Principles for Financial Inclusion and Financial
Deepening
Banking Systems Designs
Chapter 2.3
Chapter 2.4
Section 3
3
6
25
31
42
46
Building a Ubiquitous Electronic Payments Network and
Universal Access to Savings
Introduction and Strategic Direction
National Bank with Branches
National Bank with Agents
Regional Bank
55
64
66
70
Chapter 3.5
Chapter 3.6
Payment Network Operator
Payments Bank
72
74
Chapter 3.7
Recommendations Regarding Payments and Savings
79
Section 4
Chapter 4.1
Sufficient Access to Affordable, Formal Credit
Introduction and Strategic Direction
83
Chapter 4.2
Chapter 4.3
National Bank with Branches
National Bank with Agents
87
94
Chapter 4.4
Chapter 4.5
National Consumer Bank
National Wholesale Bank
96
98
Chapter
Chapter
Chapter
Chapter
Chapter
Regional Bank
Non-Banking Financial Company
Priority Sector Lending
Complementary Infrastructure
Recommendations Regarding Credit
100
106
118
132
142
Universal Access to Investment and Risk Management Products
Introduction and Strategic Direction
153
Chapter
Chapter
Chapter
Chapter
3.1
3.2
3.3
3.4
4.6
4.7
4.8
4.9
4.10
Section 5
Chapter 5.1
i
Chapter 5.2
Appointment of Agents
159
Chapter 5.3
Recommendations Regarding Investment and Risk Management
Products
163
Section 6
Chapter 6.1
Customer Protection
Introduction and Current Approaches
167
Chapter 6.2
Chapter 6.3
Suitability as an Approach
Enforcement
173
184
Chapter 6.4
Recommendations Regarding Customer Protection
188
Section 7
Measurement and Monitoring of Comprehensive Access
to Financial Services
Introduction and Strategic Direction
Ubiquitous Electronic Payments Network and Universal Access
to Savings
Sufficient Access to Affordable, Formal Credit
Universal Access to Investment and Risk Management Products
Customer Protection
Supply Side Strategy
Demand Side Strategy
Recommendations Regarding Measurement and Monitoring of
Comprehensive Access to Financial Services
Chapter 7.1
Chapter 7.2
Chapter
Chapter
Chapter
Chapter
Chapter
Chapter
7.3
7.4
7.5
7.6
7.7
7.8
Annexures
A
District-Sector Matrix for APSL
193
196
199
202
204
206
208
211
213
References
227
Endnotes
233
iii
Members’ List and Terms of Reference
Terms of Reference
1. To frame a clear and detailed vision for financial inclusion and financial deepening in
India.
2. To lay down a set of design principles that will guide the development of institutional
frameworks and regulation for achieving financial inclusion and financial deepening.
3. To review existing strategies and develop new ones that address specific barriers to
progress and that encourage participants to work swiftly towards achieving full
inclusion and financial deepening, consistent with the design principles.
4. To develop a comprehensive monitoring framework to track the progress of the
financial inclusion and deepening efforts on a nationwide basis.
5. Any other related issue/s the Committee may want to opine on.
Committee Chair:
Dr. Nachiket Mor, Central Board Member, Reserve Bank of India
Committee Members:
1. Ms. Bindu Ananth, President, IFMR Trust
2. Dr. Prakash Bakshi, Chairman, NABARD
3. Mr. Bharat Doshi, Chairman, Mahindra & Mahindra Financial Services
4. Mr. A.P. Hota, Managing Director & CEO, National Payments Corporation of India
5. Mr. Sunil Kaushal, CEO, Standard Chartered Bank India
6. Ms. Roopa Kudva, Managing Director & CEO, CRISIL Limited
7. Ms. Zia Mody, Managing Partner, AZB & Partners
8. Mr. S.S. Mundra, Chairman & Managing Director, Bank of Baroda
9. Dr. Vikram Pandit, former CEO, Citigroup (2007-2012)
10. Mr. Ramesh Ramanathan, Chairman, Janalakshmi Financial Services
11. Ms. Shikha Sharma, Managing Director & CEO, Axis Bank
12. Mr. A. Udgata, Principal Chief General Manager, Reserve Bank of India - Member
Secretary
Mr. S. Karuppasamy and Dr. Deepali Pant Joshi, both Executive Directors, Reserve Bank of
India will be the Expert Observers. Secretarial support will be provided by the Rural
Planning and Credit Department (RPCD), Reserve Bank of India.
The Committee will submit its final report by December 31, 2013.
v
Signatures of CCFS Members
Ms. Bindu Ananth
President, IFMR Trust
Dr. Prakash Bakshi
Former Chairman, NABARD
Mr. Bharat Doshi
Chairman, Mahindra & Mahindra Financial
Services
Mr. A.P. Hota
Managing Director & CEO, National Payments
Corporation of India
Mr. Sunil Kaushal
CEO, Standard Chartered Bank India
Ms. Roopa Kudva
Managing Director & CEO, CRISIL Limited
Ms. Zia Mody
Managing Partner,
AZB & Partners
Mr. S.S. Mundra
Chairman & Managing Director,
Bank of Baroda
Dr. Vikram Pandit
Former CEO, Citigroup
Mr. Ramesh Ramanathan
Chairman, Janalakshmi Financial Services
Ms. Shikha Sharma
Managing Director & CEO,
Axis Bank
Mr. A. Udgata
Principal Chief General Manager,
Reserve Bank of India - Member Secretary
Dr. Nachiket Mor
Chair, Committee on Comprehensive Financial Services for Small Businesses and Low
Income Households
Central Board Member, Reserve Bank of India
vii
Acknowledgements
The report of the Committee on Comprehensive Financial Services for Small Businesses
and Low-Income Households has been made possible only with the support and
contributions of many individuals and organisations. The Committee would like to
gratefully acknowledge this support.
The Committee expresses its gratitude to Dr. Raghuram G. Rajan, Governor, RBI, for
entrusting it with the task of preparing a report on financial inclusion and financial
deepening in India. The Committee also acknowledges his support throughout the course
of the preparation of this report. The Committee would like to sincerely thank the Deputy
Governors of Reserve Bank of India, Dr. K.C. Chakrabarty, Mr. Anand Sinha, Mr. H.R. Khan,
and Dr. Urjit R. Patel, for providing valuable inputs and guidance on a range of issues
pertaining to the Committee‘s mandate. In addition, the Committee benefited
tremendously from the guidance of Executive Directors of the RBI: Mr. G. Padmanabhan on
issues relating to payments and settlement systems, Mr. P. Vijaya Bhaskar on NBFCs and
broader issues relating to Financial Inclusion, and Dr. Deepali Pant Joshi and Mr. S.
Karuppaswamy for guiding the Committee in their capacity as Expert Observers. Ms. Usha
Thorat and her team at CAFRAL ensured the Committee got the full benefit of the
deliberations from their Udaipur conference on Mass Banking which proved to be very
valuable. The Rural Planning and Credit Department (RPCD) of the RBI provided continuous
support to the Committee, under the leadership of its Chief-General Manager-In-Charge,
Mr. A. Udgata, who also acted as the Member-Secretary of the Committee, and with the
help of Mr. A.K. Misra, General Manager, Sushma Vij, Deputy General Manager, and Mr.
T.V. Rao, Deputy General Manager, who attended every meeting of the Committee. In
addition, Regional Director, Mr. P. R. Ravi Mohan at RBI Bhopal, and Mr. R. L. Sharma and
Ms. K. S. Jyotsana at RBI Dehradun helped the Committee by coordinating and providing
valuable inputs from the field.
Many Committee members had dedicated teams working with them on the creation of this
report. The Committee would like to thank all these teams for the quality of their inputs
which have made such a report possible. In particular the Committee would like to thank
Mr. Bahram Vakil, Ms. Richa Roy, and Mr. Ashwin Ramanathan of AZB Partners, Mr. Pawan
Agarwal of CRISIL, Dr. K. Srinivasa Rao of Bank of Baroda, Mr. R. K. Bammi of Axis Bank,
Mr. Amareesh Gulati of Standard Chartered Bank, Mr. Ramesh Iyer of Mahindra Finance,
Mr. M. I. Ganagi of NABARD, Mr. Ram Rastogi of NPCI, and Mr. Raman Taneja of IFMR Rural
Finance for constantly engaging with the Committee and providing excellent feedback.
The Committee would like to thank the representatives of NABARD, Axis Bank, NPCI,
Mahindra Finance, and Bank of Baroda for graciously agreeing to host each of its meetings.
In order to ensure that the Committee had access to the most important ideas on various
aspects of financial inclusion and deepening, many organisations conducted workshops for
the benefit of the Committee. Workshops were held on issues as diverse as ensuring
ubiquity of payments, financing micro and small enterprises, measurement and monitoring
of financial inclusion and deepening, and the role of cooperative institutions. The
Committee would like the express its thanks to Mr. Kabir Kumar and Ms. Shweta Banerjee
of CGAP, Mr. Daniel Radcliffe, Mr. Jake Kendall and Mr. Kartik Raghavan of the Bill &
Melinda Gates Foundation, Ms. Maya Vengurlekar of CRISIL, Mr. Puneet Chopra and Mr.
Mukesh Sadana of Microsave, Ms. Amy Mowl and Ms. Sharon Buteau of IFMR Research, Mr.
Ram Ramdas and Ms. Gayatri Ramnath of the Jana Urban Foundation, and Ms.
Vijayalakshmi Shankar and Mr. S. Sankaranarayan of NABARD for helping put together
these workshops.
The Committee also had the opportunity to meet and get inputs from some of the senior
participants in the banking system and at UIDAI. The Committee would especially like to
ix
thank Ms. Arundhati Bhattacharya, Chairman of State Bank of India, Ms. Chanda Kochhar,
Managing Director and Chief Executive Officer of ICICI Bank, Mr. Aditya Puri, Managing
Director of HDFC Bank, and Mr. Pramit Jhaveri, Chief Executive Officer of Citibank India,
for their time and guidance. The Committee also had the opportunity to understand the
potential for Aadhaar as a mechanism to drive financial inclusion and for this it would like
to record its thanks to Mr. Nandan Nilekani, Chairman and Mr. Rajesh Bansal, Assistant
Director General of UIDAI.
The Committee appreciates and acknowledges the significant efforts put in by Ms. Simone
di Castri of the Groupe Spéciale Mobile Association (GSMA), Mr. Peer Stein, Ms. Jennifer
Isern, and Ms. Swati Sawhney of the International Finance Corporation (IFC), and Mr. Alok
Prasad and Ms. Pallavi Sen of the Micro Finance Institutions Network (MFIN), in presenting
detailed submissions while responding to specific issues raised by the Committee. The
Committee would like to express its gratitude for their substantial inputs to Dr. Viral
Acharya of the New York University‘s Stern School of Business, Dr. Ajay Shah of the Macro
Finance Group at the National Institute of Public Finance and Policy (NIPFP), Ms. Namrata
Kaul and her colleagues from the Payments Group at the Frankfurt office of Deustche
Bank, and Mr. Harish Natarajan and Mr. Massimo Cirasino of the Payments Group at the
World Bank.
In addition, the Committee also benefited from inputs by Mr. Robert Annibale of Citi
Foundation, Dr. Estelle Brack of Fédération Bancaire Française, Ms. Séverine Leboucher a
French Financial Journalist who writes for Revue-Banque, Ms. Madhabi Buch of Greater
Pacific Capital, Ms. Nimilita Chatterjee of Equifax India, Dr. Michael Chu of the Harvard
Business School, Dr. Asli Demirgüc-Kunt of the World Bank, Dr. Robert DeYoung of the
University of Kansas School of Business, Mr. Brahmanand Hegde of Vistaar Finance, Mr.
Arun Jain of Polaris, Professor Ashok Jhunjhunwala and Professor Gaurav Raina of IIT
Madras, Mr. Sanjay Kaul of NCML, Mr. Manish Khera of FINO, Dr. José A. Lopez of the
Federal Reserve Bank of San Francisco, Mr. Susil Muhnot and Mr. Naveen Kumar Maini of
the Small Industries Development Bank of India (SIDBI), Mr. Jagan Mohan of KBS Local Area
Bank, Mr. Narayana Murthy of Infosys Limited, Ms. Kalpana Pandey of High Mark Credit
Information Services, Ms. Smita Ramakrishna of RangDe, Dr. K. Ramakrishnan of the IBA,
Dr. Elisabeth Rhyne of the Centre for Financial Inclusion at ACCION in Washington DC, Dr.
Aruna Sharma of the Government of Madhya Pradesh, Dr. P.S. Srinivas of the World Bank,
Mr. Renny Thomas of McKinsey & Co., Ms. Amina Tirana on behalf of Her Majesty Queen
Máxima of the Netherlands, and Mr. M.Titus of Sa-Dhan.
In putting together this report, Mr. Bipin Nair, Assistant General Manager with the RPCD,
acted as the Committee‘s Secretariat at the RBI and provided critical data, logistical and
coordination support.
The Committee would in particular like to commend the enormous hard work put in by the
IFMR Finance Foundation team - Ms. Deepti George, Mr. Rachit Khaitan, Mr. Dinesh Lodha,
Mr. Vishnu Prasad, Dr. Santadarshan Sadhu, and Mr. Anand Sahasranaman who not only
provided very useful research and technical support but also worked unstintingly to ensure
that this report was completed in such a short span of time.
Finally, the Committee would like to thank all institutions and members of the public who
wrote in with comments, thoughts, and suggestions. While it may not have been possible
to use them all, the extent of interest and concern around the themes of financial
inclusion and financial deepening once again reiterated the tremendous significance of
these issues for India‘s present and future.
x
List of Acronyms and Abbreviations
AD
AEPS
AFS
AIC
AIDIS
AII
AMC
AML
ANBC
APO
APSL
ARG
ASCB
ASIC
ATM
AUD
AUM
AWS
BBNL
BC
BF
BIRD
Authorised Dealer
Aadhaar-Enabled Payments Switch
Available-for-Sale
Agricultural Insurance Company
All India Debt and Investment Survey
Accredited Individual Investors
Asset Management Company
Anti-Money Laundering
Adjusted Net Bank Credit
Army Post Office
Adjusted PSL
Automatic Rain Gauge
Association of Cantonal Banks
Australian Securities and Investments Commission
Automated Teller Machine
Australian Dollar
Assets Under Management
Automatic Weather Station
Bharat Broadband Network Limited
Business Correspondent
Business Facilitator
Bankers Institute of Rural Development
BIS
BOO
BR Act
BRI
BRIC
BSBDA
BSR
CAB
CAFRAL
CBI
CBS
CCI
CEO
CERC
CERSAI
CFPB
CFT
Bank of International Settlements
Build-Own-Operate
Banking Regulations Act, 1949
Bank Rakyat Indonesia
Brazil, Russia, China, India
Basic Savings Bank Deposit Account
Basic Statistical Returns
College of Agricultural Banking
Centre for Advancement in Financial Research and Learning
Central Bureau of Investigation
Core Banking System
Competition Commission of India
Chief Executive Officer
Central Electricity Regulatory Commission
Central Registry of Securitisation Asset Reconstruction and Security
Interest of India
Consumer Financial Protection Bureau
Combatting the Financing of Terrorism
CGAP
Consultative Group to Assist the Poor
xi
CGMS
Central Grievance Management System
CGTMSE
CIBIL
Credit Guarantee Fund Trust for Micro and Small Enterprises
Credit Information Bureau Limited
CIC
CICA
Core Investment Company
Credit Information Companies Act
CICO
CIS
Cash In Cash Out
Collective Investment Scheme
CMIE
COBS
Centre for Monitoring Indian Economy
Conduct of Business
CRR
CSC
Cash Reserve Ratio
Community Service Centre
CSP
CWC
Customer Service Point
Central Warehousing Corporation
DBT
DCCB
DFI
D-NBFC
Direct Benefit Transfer
District Central Cooperative Bank
Development Finance Institution
Deposit Taking NBFC
DSGV
ECB
Deutscher Sparkassen und Giroverband
European Central Bank
EIC
EOD
Economic Intelligence Council
Economic Offenses Division
EOW
EPFO
Economic Offenses Wing
Employees' Provident Fund Organisation
ETF
EU
FATF
FCI
FDIC
Fed.
FIU-IND
FLC
FLCC
FMC
FoP
FOS
Exchange Traded Fund
European Union
Financial Action Task Force
Food Corporation of India
Federal Deposit Insurance Corporation
Federal Reserve
Financial Intelligence Unit-India
Financial Literacy Centre
Financial Literacy and Credit Counselling
Forward Markets Commission
Friends of Police
Financial Ombudsman Service
FPO
FRA
Fleet Post Office
Financial Redress Agency
FSA
FSB
Financial Services Authority
Financial Stability Board
FSLRC
FSP
FSR
Financial Sector Legislative Reforms Commission
Financial Services Provider
Financial Services Reform Act, 2001
xii
G2P
Government to Person
GBP
GCC
Great Britain Pound
General Credit Card
GDDP
GDP
Gross District Domestic Product
Gross Domestic Product
GIC
GNPA
General Insurance Corporation of India
Gross NPA
GOI
GPFI
Government of India
Global Partnership for Financial Inclusion
GPRS
GRC
General Packet Radio Service
Grievance Redressal Cell
GSDP
GSE
Gross State Domestic Product
Government Sponsored Enterprises
HDBS
HFC
HTM
IBA
Horizontally Differentiated Banking System
Housing Finance Company
Held-to-Maturity
Indian Banks‘ Association
IFC
IGIDR
International Finance Corporation
Indira Gandhi Institute of Development Research
IMD
IMF
Indian Meteorological Department
International Monetary Fund
IMPS
IRDA
Immediate Mobile Payment System
Insurance Regulatory and Development Authority
JLG
JNNURM
KCC
KGFS
KYC
LAB
LACP
LDM
LIC
LOLR
LTA
MCA
Joint Liability Group
Jawaharlal Nehru National Urban Renewal Mission
Kisan Credit Card
Kshetriya Gramin Financial Services
Know Your Customer
Local Area Bank
Los Angeles Community Policing
Lead District Manager
Life Insurance Corporation of India
Lender of Last Resort
Land Titling Authorities
Ministry of Corporate Affairs
MFI
MITC
Microfinance Institution
Most Important Terms and Conditions
MMMF
MSB
Money Market Mutual Fund
Money Service Business
MSME
NABARD
NAFSCOB
Micro, Small, and Medium Enterprises
National Bank for Agriculture and Rural Development
National Federation of State Cooperative Banks
xiii
NBFC
Non-Banking Financial Company
NCAER
NCMSL
National Council of Applied Economic Research
National Collateral Management Services Limited
ND-NBFC
NDTL
Non Deposit Taking NBFC
Net Demand and Time Liability
NECS
NEFT
National Electronic Clearing Service
National Electronic Funds Transfer
NFA
NHB
No-Frills Account
National Housing Bank
NOFN
NPA
National Optical Fibre Network
Non-Performing Asset
NPS
NREGA
National Pensions Scheme
National Rural Employment Guarantee Act, 2005
NSSO
OFO
OTP
PACS
National Sample Survey Organisation
Office of the Financial Ombudsman
One-Time-Password
Primary Agricultural Cooperative Society
PFRDA
PLATINUM
PNO
POA
Pension Fund Regulatory and Development Authority
Working Group on Partnerships for Land Title Implementation in Urban
Management
Payment Network Operator
Proof of Address
POI
PoP
Proof of Identity
Point of Purchase
POS
PPI
PPP
PSD
PSL
PTC
QIB
RAROC
RBI
RBS
RGS
RIDF
Point of Sale
Pre-Paid Instrument Issuer
Public Private Partnership
Payment Services Directive
Priority Sector Lending
Pass-Through Certificate
Qualified Institutional Buyer
Risk Adjusted Return on Capital
Reserve Bank of India
Risk Based Supervision
Rural Godown Scheme
Rural Infrastructure Development Fund
RP
RRB
Resource Person
Regional Rural Bank
Rs.
RTGS
Indian Rupees
Real Time Gross Settlement Service
RUA
RWS
Reference Unit Area
Reference Weather Station
xiv
SARFAESI
SAT
SBI
Securitisation and Reconstruction of Financial Assets and Enforcement
of Security Interest Act
Securities Appellate Tribunal
State Bank of India
SCB
SCORES
Scheduled Commercial Bank
SEBI Complaints Redress System
SEBI
SFIO
Securities and Exchange Board of India
Serious Fraud Investigation Office
SFRC
SHG
State Finance Regulatory Commission
Self-Help Group
SIDBI
SIFI
Small Industrial Development Bank of India
Systemically Important Financial Institution
SIV
SLR
SMS
SPARC
SPV
sq. km.
Special Investment Vehicles
Statutory Liquidity Ratio
Short Message Service
Supervisory Program for Assessment of Risk and Capital
Special Purpose Vehicle
Square Kilometre(s)
StCB
SWC
State Cooperative Bank
State Warehousing Corporation
TCF
TILA
Treating Customers Fairly
Truth in Lending Act
TRAI
UCB
Telecom Regulatory Authority of India
Urban Cooperative Bank
UEBA
UIDAI
ULIP
UPIN
USB
USD
USSD
VDB
VDBS
WBCIS
WL-ATM
WL-BC
Universal Electronic Bank Account
Unique Identification Authority of India
Unit-Linked Insurance Policies
Unique Property Identification Numbers
Ultra-Small Branch
United States Dollar
Unstructured Supplementary Service Data
Verband Deutscher Bürgschaftsbanken
Vertically Differentiated Banking System
Weather Based Crop Insurance Scheme
White Label ATM
White Label Business Correspondent
xv
Section 1
Overview
Preface
Chapter 1.1
Preface
Providing access to financial services to low-income households and small businesses is not
a new goal for India. Policy makers are also well aware of its importance and have been
very willing to learn from the successful experiences of other countries and to experiment
with new ideas. However, the record of progress on this front has left a great deal to be
desired. On both Financial Inclusion (defined as the spread of financial institutions and
financial services across the country) and Financial Depth (defined as the percentage of
credit to GDP at various levels of the economy) the overall situation remains very poor
and, on a regional and sectoral basis, very uneven. An estimate suggests that close to 90
per cent1 of small businesses have no links with formal financial institutions and 60 per
cent2 of the rural and urban population do not even have a functional bank account. And,
while the bank credit to GDP ratio in the country as a whole is a modest 70 per cent, in a
large state such as Bihar, it is even lower at a mere 16 per cent3. This has left a large part
of the economy dependent on the informal sector for meeting its credit needs. On the
savings front, difficulties of access combined with an absence of a positive real return on
financial savings, has accelerated the move away from financial assets to physical assets
and unregulated providers. RBI‘s June 2013 Financial Stability Report notes that savings as
a proportion to GDP has fallen from 36.8 per cent in 2007-08 to 30.8 per cent in 2011-12
and the financial savings of households have declined from 11.6 per cent of GDP to 8 per
cent during the same period. It is clear that the demand for high-quality formal financial
services is not a constraint – there is robust and visible demand for a wide range of
financial services by small businesses and low-income households combined with a
willingness to pay for them. The challenge is clearly the ability of the formal financial
system to mount a strong supply response, which needs to be strengthened considerably.
As one examines the financial inclusion landscape in India, the sheer energy that has been
put behind the effort and the seriousness with which providers and regulators have
pursued this goal is impressive. However, it is possible that it is this very energy that has
been its key weakness as well, because it has propelled highly engaged regulators and
policy makers to move from one big idea to another, each time convinced that they have
finally found the key to financial inclusion, whether it be cooperative banks,
nationalisation of banks, self-help groups, regional rural banks, or business
correspondents. While there is no question that there is a continuing need to explore new
ideas; learn from the experiences of other nations; and benefit from new technologies;
perhaps it is not the best regulatory strategy to centrally pick one approach no matter
how convincing it may seem and to push the entire system in that particular direction to
the exclusion of all others. A better approach may instead be to articulate a clear vision;
establish a set of design principles; and then to permit all strategies, new and old, to
flourish or to die out based on their inherent strengths and weaknesses. India is a very
large and a very diverse country and no one strategy, however well designed, can ever
hope to serve the entire country.
And, while there is no doubt that the goals of comprehensive financial access are very
important, given their sheer magnitude, they need to be pursued in manner that does not
end up threatening the stability of the financial system by building up high levels of nonperforming assets or impairing the profitability of the financial institutions engaged in
these tasks. For example, there is a concern that the current approach which is
exclusively reliant on full-service, national level, scheduled commercial banks using their
own branches and a network of mostly informal agents, while potentially a very good idea
for some banks and for some regions of the country, for several banks and several regions
is building up an extremely high risk portfolio of assets, and a high cost infrastructure but
is not doing much by way of building comprehensive access to finance for low-income
3
Preface
households and small businesses. Priority Sector Lending (PSL) guidelines require banks to
allocate 40 per cent of their lending book to it, and how they are implemented by the
bank has a significant impact on its performance as a whole. However, whenever financial
inclusion goals are generally specified and strategies articulated, there is little
acknowledgement of risk and cost-to-serve considerations. This has had a severe impact
and, despite the loan waivers that took place a few years ago, more than half the total
NPAs on their books are attributable to this sector with an NPA ratio that is close to
double that of the rest of the asset book. Unless these issues are integrated in discussions
on financial inclusion, banks will always be reluctant participants. Given this important
background, this Report overall makes a conscious effort to redress this imbalance and
issues of risks and costs have been kept at the very centre of the discussions of each of the
strategies for providing better access to financial services to small businesses and lowincome households.
With this perspective in view and in accordance with the Terms of Reference given to it,
in its deliberations, the Committee focussed its attention on:
1. Framing a clear and detailed vision for financial inclusion and financial deepening in
India.
2. Articulating a set of design principles that will guide the development of institutional
frameworks and regulation for achieving financial inclusion and financial deepening,
including approaches to prudential regulation, consumer protection, and systemic risk
management for institutions involved in financial inclusion and deepening, so that the
eventual design: (a) provides a complete suite of suitable financial services to each
and every small business and low-income household in a flexible, convenient, reliable,
and continuous manner; (b) is highly cost effective; (c) ensures a high degree of
customer protection, and enhancement of financial wellbeing; and (d) enhances
systemic stability.
3. In the light of the detailed vision and the design principles, carefully reviewing each
existing channel and suggesting how its performance may be improved based on both
domestic and global experiences.
4. Where necessary, recommending new ideas for consideration by the RBI and other
policy makers, in order to address specific barriers to progress and to encourage
participants to work swiftly towards the full achievement of the vision in a manner
that is consistent with the design principles.
5. Developing a comprehensive monitoring framework to track the progress of the
financial inclusion and deepening efforts on a nationwide basis.
At the end of its deliberations the Committee finds that each of the channels, be they
large National Banks, regional cooperative banks, or Non-Banking Financial Companies
(NBFCs) have a great deal of continuing value to add. However, the entire approach would
need to markedly change from one in which all the players become clones of each other
because they are all required to adhere to one centrally designed blue-print, to one that
would permit each one to focus on its own differentiated capabilities and accomplish the
national goals of financial inclusion by partnering with others that bring complementary
capabilities to bear on the problem. In such a structure systemic stability would be
preserved by ensuring that each participant is required to transparently reveal the risks
that it is exposed to and to have an adequate level of capability and financial capital to
assume those risks. The best possible outcomes on outreach, pricing, and services would
4
Preface
be achieved by ensuring that each participant is treated in a neutral manner so that it is
not operating in an environment that is either biased in its favour or against it and that it
survives or fails based entirely on its inherent strengths and the efficacy of its strategies.
The regulator, while paying close attention to the achievement of financial inclusion goals
of the system as a whole would allow each participant to exercise significant autonomy to
chart its own path. It would also exercise constant vigilance in order to ensure that key
design principles such as systemic Stability, complete Transparency of balance sheets,
Neutrality of regulatory stance towards different types of participants, and the need to
protect customers, are not violated.
Such an environment however, also needs the development of mechanisms for an active
transfer of assets, liabilities, and risks between financial markets participants and a
movement away from a structure where each player is required to raise its own liquidity;
originate all of its own risks and assets; and then necessarily hold them to maturity. The
presence of such mechanisms, not merely good governance, has for example ensured the
continued success of the Sparkassens (the German version of Regional Banks) and their
absence was directly responsible for the demise of the Development Finance Institutions
(DFIs) in India (the Indian version of Wholesale Banks). Fortunately India already has most
of the enablers necessary for a vibrant risk-transfer mechanism to come about but a
number of concrete steps would need to be taken to ensure the development of such
mechanisms in India. It would for example require central institutions such as National
Bank for Agriculture and Rural Development (NABARD), Small Industries Development Bank
of India (SIDBI), and National Housing Bank (NHB) to considerably strengthen their own risk
assessment capabilities and instead of using their balance sheets to absorb these risks,
become actively involved in helping to create markets for risk and liquidity transfers
between market participants. It would also need the development and strengthening of
several pieces of complementary infrastructure such as credit bureaus, weather stations,
commodity markets, and warehouses.
The last few years have seen dramatic improvements on several fronts linked to supplyside infrastructure. The Unique Identification (UID) project has already covered 50 crore
Indians and expects to complete the task of issuing a UID to the rest of the country by
2016. By linking UID numbers to Know Your Customer (KYC) norms, RBI has already paved
the way for universalising bank accounts, thus removing one of the most important
barriers to financial access. Through the Bharat Broadband Network, the Government is
laying out the National Optical Fibre Network to all the Gram Panchayats in the country
and expects to complete this task by 2014. Against only 3 crore fixed line subscribers,
telecommunications companies now have over 87 crore4 mobile phone subscribers of
whom over 35 crore are based in rural areas and, while the urban number has stabilised,
the rural number continues to grow at an annualised rate of 10 per cent. If these
opportunities are used well, paradoxically, it is even possible that poor historic progress
on financial inclusion may actually present India with an opportunity to leap-frog over the
rest of the world and may prove to be an advantage just as the absence of copper-wire
allowed India to move directly to mobile telephony. The Committee explores a number of
ways that this can be done, benefitting from the early experiences of developing countries
such as Kenya, Brazil, and South Africa as well as that of the European Union which has
transformed its payment landscape in recent years.
India already has all the elements for success in place – a wide range of institutional types,
well-developed financial markets, a good regulatory framework, and large scale and high
quality authentication and transaction platforms. The Committee is therefore optimistic
that with a concerted effort it should be possible to ensure the achievement of several
key goals such as universal access to a bank account; a ubiquitous payments
infrastructure; and a base level access to all the other financial products such as credit
and insurance within a relatively short period of time.
5
Executive Summary and List of Recommendations
Chapter 1.2
Executive Summary and List of Recommendations
Section 1 introduces the Report.
Section 2 provides the vision statements, current data on access, design principles and a
theoretical framework to examine various banking system designs.
The six vision statements are:
1. Universal Electronic Bank Account (UEBA): By January 1, 2016 each Indian resident,
above the age of eighteen years, would have an individual, full-service, safe, and
secure electronic bank account.
2. Ubiquitous Access to Payment Services and Deposit Products at Reasonable Charges: By
January 1, 2016, the number and distribution of electronic payment access points
would be such that every single resident would be within a fifteen minute walking
distance from such a point anywhere in the country. Each such point would allow
residents to deposit and withdraw cash to and from their bank accounts and transfer
balances from one bank account to another, in a secure environment, for both very
small and very large amounts, and pay ―reasonable‖ charges for all of these services.
At least one of the deposit products accessible to every resident through the payment
access points would offer a positive real rate of return over the consumer price index.
3. Sufficient Access to Affordable Formal Credit: By January 1, 2016, each low-income
household and small-business would have ―convenient‖ access to formally regulated
lenders that have the ability to assess and meet their credit needs, and offer them a
full-range of ―suitable‖ credit products, at an ―affordable‖ price. By that date, each
District and every ―significant‖ sector (and sub-sector) of the economy would have a
Credit to GDP ratio of at least 10 per cent. This ratio would increase every year by 10
per cent with the goal that it reaches 50 per cent by January 1, 2020.
4. Universal Access to a Range of Deposit and Investment Products at Reasonable
Charges: By January 1, 2016, each low-income household and small-business would
have ―convenient‖ access to providers that have the ability to offer them ―suitable‖
investment and deposit products, and pay ―reasonable‖ charges for their services. By
that date, each District would have a Total Deposits and Investments to GDP ratio of at
least 15 per cent. This ratio would increase every year by 12.5 per cent with the goal
that it reaches 65 per cent by January 1, 2020.
5. Universal Access to a Range of Insurance and Risk Management Products at Reasonable
Charges: By January 1, 2016, each low-income household and small business would
have ―convenient‖ access to providers that have the ability to offer them ―suitable‖
insurance and risk management products which, at a minimum allow them to manage
risks related to: (a) commodity price movements; (b) longevity, disability, and death
of human beings; (c) death of livestock; (d) rainfall; and (e) damage to property, and
pay ―reasonable‖ charges for their services. By that date, each District would have a
Total Term Life Insurance Sum Assured to GDP ratio of at least 30 per cent. This ratio
would increase every year by 12.5 per cent with the goal that it reaches 80 per cent by
January 1, 2020.
6. Right to Suitability: Each low-income household and small-business would have a
legally protected right to be offered only ―suitable‖ financial services. While the
customer will be required to give ―informed consent‖ she will have the right to seek
6
Executive Summary and List of Recommendations
legal redress if she feels that due process to establish Suitability was not followed or
that there was gross negligence.
The four design principles that would inform financial inclusion and deepening strategies
discussed in the Report are: Systemic Stability, Balance-sheet Transparency, Institutional
Neutrality, and Responsibility towards the Customer.
The framework to understand various types of banking system designs uses the functional
building blocks of payments, deposits and credit and constructs two broad designs. These
are the Horizontally Differentiated Banking System (HDBS) and the Vertically
Differentiated Banking System (VDBS). Across these, ten existing and potential banking
designs were identified. These are: National Bank with Branches, National Bank with
Agents, Regional Bank, National Consumer Bank, National Wholesale Bank, National
Infrastructure Bank, Payments Network Operator, Payments Bank, Wholesale Consumer
Bank, and Wholesale Investment Bank. Subsequent chapters build on this framework for
detailed discussions.
Section 3 examines issues relevant to the goal of a ubiquitous payments network and
universal access to savings. The following recommendations are made in this section:
3.1
Every resident should be issued a Universal Electronic Bank Account (UEBA)
automatically at the time of receiving their Aadhaar number by a high quality,
national, full-service bank. An instruction to open the bank account should be
initiated by UIDAI upon the issuance of an Aadhaar number to an individual over
the age of 18. The bank would need to be designated by the customer from
amongst the list of banks that have indicated to UIDAI that they would be willing to
open such an account with the understanding that it would attract no account
opening fee but that the bank would be free to charge for all transactions,
including balance enquiry with the understanding that such transactions‘ charges
would provide the host banks with adequate compensation. The Bank would be
required to send the customer a letter communicating details of the account thus
opened. The Committee recommends that the RBI issue a circular indicating that
no bank can refuse to open an account for a customer who has adequate KYC which
specifically includes Aadhaar. [Identical to Recommendation 5.1]
3.2
RBI should require a strong Proof of Identity (POI) for each and every customer and
a documentary proof of one national address but waive the requirement of
documentary proof for the current address, for the purpose of opening a fullservice bank account. It should instead enjoin upon banks to carry out careful
tracking of usage and transactions patterns to ascertain the risk levels of the
customer and take necessary action based upon risk-based surveillance processes
developed internally by each bank. [Identical to Recommendation 5.2]
3.3
Under the existing rural branching mandate, a qualifying branch may be understood
to have specified features regarding minimum services available, minimum hours of
operation, nature of employment of staff, minimum infrastructure configuration,
nature of ownership of infrastructure and premises, and minimum customer
protection. In addition, this mandate is to be reviewed regularly and be phased out
once the goals specified in the vision statement for payments services and deposit
products have been achieved.
3.4
Aadhaar is the key piece of infrastructure to enable a customer to be identified
and authenticated so that repudiation and fraud risks are minimised and therefore
should become the universal basis for authentication. However, with slow
enrolment in some areas and low penetration of biometric devices and internet
7
Executive Summary and List of Recommendations
network connectivity in many areas, intermediate authentication methods such as
PIN numbers and OTP could be used. State Governments need to coordinate more
closely with UIDAI, NPR, and BBNL to ensure rapid coverage of their states for both
Aadhaar and broadband.
3.5
Restore the permission of ND-NBFCs to act as BCs of a bank. Concerns around
commingling can be effectively handled through technology-based solutions such
that all settlements happen on an intra-day basis. In addition, eliminate the
distance criteria between the BC and the nearest branch of the sponsor bank.
Allow Banks to decide operational criteria.
3.6
The Taskforce on Aadhaar Enabled Unified Payment Infrastructure recommended
that State Governments pay a fee of 3.14 per cent (subject to a cap of Rs. 15.71
per transaction) for Direct Benefit Transfer (DBT) payments originating from
governments. RBI should enjoin upon State Governments to implement the same.
3.7
In order to address contagion risk concerns, instead of requiring White Label ATMs
to access the settlement systems in a ―nested‖ manner through a sponsor bank,
provide them direct access to the settlement system subject to certain prudential
conditions, to mitigate operation risk.
3.8
In order to ensure that the BC infrastructure that is established is utilised in an
optimal manner and shared by multiple banks, which may each have account
holders in a specific geography, allow high-quality White Label BCs to emerge with
direct access to settlement systems subject to certain prudential conditions. This
would be similar to Recommendation 3.7 vis-à-vis mitigating operations risk in the
White Label ATM network.
3.9
Given the difficulties being faced by PPIs and the underlying prudential concerns
associated with this model, the existing and new PPI applicants should instead be
required to apply for a Payments Bank licence or become Business Correspondents.
No additional PPI licences should be granted.
3.10
Under the Banking Regulation Act, a set of banks may be licensed which may be
referred to as Payments Banks with the following characteristics:
a. Given that their primary role is to provide payment services and deposit
products to small businesses and low-income households, they will be restricted
to holding a maximum balance of Rs. 50,000 per customer.
b. They will be required to meet the CRR requirements applicable to all the
Scheduled Commercial Banks.
c. They will be required to deposit the balance proceeds in approved SLR
securities with a duration of no more than three months and will not be
permitted to assume any kind of credit risks.
d. In view of the fact that they will therefore have a near-zero risk of default, the
minimum entry capital requirement for them will be Rs. 50 crore compared to
the Rs. 500 crore required for full-service SCBs.
e. They will be required to comply with all other RBI guidelines relevant for SCBs
and will be granted all the other rights and privileges that come with that
licence.
f. Existing SCBs should be permitted to create a Payments Bank as a subsidiary.
8
Executive Summary and List of Recommendations
3.11
RBI to work with TRAI to ensure that all mobile phone companies, including those
with Payments Bank subsidiaries, be mandated to provide USSD connectivity as per
recent TRAI regulations with the price cap of Rs. 1.5 per 5 interactive sessions and
to categorise all SMSs related to banking and financial transactions as Priority SMS
services with reasonable rates and to be made available to the banking system.
Section 4 examines issues relevant to the goal of sufficient access to affordable, formal
credit. The following recommendations are made in this section:
4.1
In order to encourage banks to actively manage their exposures to various sectors,
including priority sectors, a number of steps would have to be taken:
a. Banks must be required to disclose their concentration levels to each segment
in their financial statements.
b. Credit facilities documented as bonds or Pass-Through Certificates (PTC),
whether originated directly or purchased in the secondary markets should be
permitted to be held in the ―banking book‖ of a bank based on declared intent
and not merely based on source or legal documentation. [Identical to
Recommendations 4.10 and 4.30]
c. RBI must represent to the MoF to restore the tax-free status of securitisation
SPVs as pass-through vehicles for tax treatment pointing out the role it would
play in ensuring efficient risk transmission. [Identical to Recommendations 4.11
and 4.38]
d. Banks must be permitted to purchase portfolio level protection against all
forms of rainfall and commodity price risks, including through the use of
financial futures and options bought either within India or globally.
4.2
Universal reporting to credit bureaus should be mandated for all loans, both
individual and SME, but in particular SHG loans, Kisan Credit Card, and General
Credit Card. [Identical to Recommendation 4.43]
4.3
In view of the fact that banks may choose to focus their priority sector strategies
on different customer segments and asset classes, it is recommended that the
regulator provide specific guidance on differential provisioning norms at the level
of each asset class. A bank‘s overall NPA Coverage Ratio would therefore be a
function of its overall portfolio asset mix. On standard assets, provisioning levels as
well as asset classification guidelines specified by RBI would need to reflect the
underlying level of riskiness of each asset class (combination of customer segment,
product design, and collateral) and not be uniform across all the asset classes.
Additionally, different customer-asset combinations behave very differently from
each other and it is recommended that the regulator mandate NPA recognition
rules at the level of each asset-class and require that all banks conform to these
mandates. [Identical to Recommendation 4.21 for NBFCs]
4.4
All banks should be required to publicly disclose the results of their stress tests
both at an overall balance sheet level as well as at a segmental level at least
annually. [Identical to Recommendation 4.22 for NBFCs]
4.5
From the perspective of Stability that entails sustainable pricing, banks must be
required to freely price farm loans based on their risk models and any subventions
and waivers deemed necessary by the government should be transferred directly to
the farmers and not through interest subsidies or loan waivers. The permission to
9
Executive Summary and List of Recommendations
price farm loans below the base rate should be withdrawn. [Also see
Recommendation 4.34]
4.6
Banks are already permitted to set up specialised subsidiaries upon getting specific
approvals from the RBI. However, no approvals have been granted; potentially due
to concerns around circumvention of branch licensing guidelines. In light of the
recent relaxation of branch licensing guidelines and the capability carry to out
consolidated supervision, the requirement of prior approvals may be removed for
the purpose of creating dedicated subsidiaries for financial inclusion.
4.7
The decision on the manner in which risk sharing and credit approval arrangements
need to be structured between banks and their agents can be left to the judgment
of banks. Outsourcing guidelines should be amended to permit this.
4.8
There is a need to develop a robust legal and regulatory framework around
customer data generated in various transactions (credit and payments, digital and
off-line), with the objective of customer ownership of their own transactions data
and its use, among others, for signalling credit-worthiness. RBI should constitute a
Working Group comprising TRAI, CERC, and Credit Information Companies to
develop a framework for sharing of data between telecom companies, electrical
utilities, and credit bureaus. This framework should be in keeping with the FSLRC‘s
draft Indian Financial Code which recommends the creation of regulations on the
collection, storage, modification and protection of personal information by
financial services providers; and establishment of mechanisms to ensure that
consumers have access to, and are given an effective opportunity to seek
modifications to, their personal information. [Identical to Recommendation 4.42]
4.9
The stipulation that the all-inclusive interest charged to the ultimate borrower by
the originating entity should not exceed the Base Rate of the purchasing bank plus
8 per cent per annum should be removed. [Identical to Recommendation 4.37]
4.10
Credit facilities documented as bonds or Pass-Through Certificates (PTC), whether
originated directly or purchased in the secondary markets should be permitted to
be held in the ―banking book‖ of a bank based on declared intent and not merely
based on source or legal documentation. [Identical to Recommendations 4.1(b) and
4.30]
4.11
RBI should also represent to the Government of India to restore the tax-free status
of securitisation SPVs as pass-through vehicles for tax treatment so as to create
pathways for Wholesale Banks to provide liquidity to other Banks and Financial
Institutions directly originating assets in priority sectors. [Identical to
Recommendations 4.1(c) and 4.38]
4.12
Reorient the focus of NABARD, CGTMSE, SIDBI, and NHB to be market makers and
providers of risk-based credit enhancements rather than providers of direct
finance, automatic refinance, or automatic credit guarantees for National Banks.
4.13
Regional Banks continue to have a strong appeal for inclusion but low
demonstrated stability in the Indian context. Robust solutions are required vis-à-vis
regulation, supervision, risk management, and governance of the existing Regional
Banks before any new ones are created.
4.14
In a manner similar to National Banks, for Regional Banks as well, refinance by
NABARD or credit guarantee support by CGTMSE should be designed as risk-based
guarantees and not available automatically. [Similar to Recommendation 4.12]
10
Executive Summary and List of Recommendations
4.15
While the Risk Based Supervision process has been designed for the larger and more
complex institutions, a similar effort could be conceived of for the Regional Banks
allowing supervisors to direct scarce on-site supervision resources to higher-risk
institutions. The help of commercial ratings agencies could also be taken to
formally rate these Regional Banks and provide the ratings to the depositors on a
regular basis – thus including them more directly into the risk-containment process.
4.16
Since DICGC offers deposit insurance to these banks, the Agreement between
DICGC and the bank provides an additional opportunity to both ensure that the
bank is run well on an on-going basis and resolved quickly in the event that it turns
insolvent. Such an Agreement would provide for risk-based pricing of deposit
insurance; the right to carry out both on-site and off-site inspections; and to take
possession of the bank in the event that it goes into liquidation.
4.17
A State Finance Regulatory Commission (SFRC) could be created into which all the
existing State Government-level regulators could be merged and functions like the
regulation of NGO-MFIs and local Money Services Business could be added on. In
some states, the SFRC could be created by upgrading existing Institutional Finance
Cells. There is also value in bringing the regulatory function close to the
enforcement function under the Economic Offences Wing (EOW), so as to ensure
that they are working closely together. The RBI must be closely involved over a
longer time frame in training the commissioners and licensing and accrediting the
Commission itself. The local regional directors of the RBI could, for example, be
ex-officio Chairs of the Commission‘s Board of Governors while the Commissioner
could be a senior State level appointee drawn from the local Banking community.
The District Magistrates would also play an important role in their respective
districts.
Non-Banking Finance Companies
4.18
The Committee recognises that a partial convergence of NBFC and Bank regulations
may be desirable. It recommends the following:
Regulations
Minimum Capital
Adequacy
Cash Reserve Ratio
Banks
NBFC
9%
15%
4%
N.A
Statutory Liquidity
Ratio
23%
15% for D-NBFCs
on their deposits
Duration to qualify
for NPA
Non-repayment for 90
days
Non-repayment
for 180 days
Definition for substandard asset
NPA for a period not
exceeding 12 months
NPA for a period
not exceeding 18
months
Recommendation
No case for
convergence.
CRR applicable on
bank deposits, shift
to exclude time
deposits
recommended.
Complete
elimination
recommended.
Case for
convergence. Riskbased approaches
to be followed for
both types of
institutions.
Case for
convergence. Riskbased approaches
to be followed for
both types of
institutions.
11
Executive Summary and List of Recommendations
Definition for
doubtful assets
Remaining sub-standard
asset for a period of 12
months
Quantum of
provisioning for
Standard Assets
Direct advances to
agricultural and Small
and Micro Enterprises
(SMEs) sectors at 0.25%
Priority Sector
Remaining substandard asset for
a period
exceeding 18
months
0.25%
40% of ANBC
NIL
Deposit Insurance
YES
NO for D-NBFCs
SARFAESI eligibility
YES
NO
Lender of Last
Resort
Risk Weights
YES
NO
Differential
100% for all
assets
Rs. 2-5 crore
Entry Capital
Requirement
Rs. 500 crore
Case for
convergence. Riskbased approaches
to be followed for
both types of
institutions.
Case for
convergence. Riskbased approaches
to be followed for
both types of
institutions. For
agricultural
advances, this
would imply at
least 0.40%.
No case for
convergence.
No case for
convergence.
Case for
convergence
subject to strong
customer
protection
guidelines.
No case for
convergence.
No case for
convergence.
No case for
convergence.
4.19
Multiple NBFC definitions should be consolidated into two categories: a distinct
category for Core Investment Companies (CIC) and another category for all other
NBFCs. Benefits that were previously available to specific NBFC types, such as tax
benefits, bank limits, and priority sector benefits should continue to be available
even after consolidation, on a pro-rata asset basis.
4.20
The Committee recommends addressing wholesale funding constraints faced by
NBFCs in a systematic manner. The following are the specific recommendations in
this regard:
a. A clear framework to be developed by RBI and SEBI for Qualified Institutional
Buyers and Accredited Individual Investors who may participate in debt market
issuances of NBFCs.
b. Benefit of ‗shelf prospectus‘ should be available for one year to all issuers
including NBFCs.
c. Permit ECB in Rupees for all institutions.
d. For ECB not in Rupees, eligibility should be linked to size and capacity to
absorb foreign exchange risk rather than specific NBFC categories.
12
Executive Summary and List of Recommendations
e. The nature of activity, rather than institution type, must be made the criterion
for availing refinance from NABARD, NHB, SIDBI and credit guarantee facilities.
f. Current capitalisation slabs on foreign equity funding should be relaxed and
money laundering concerns should be mitigated by instituting additional
reporting requirements on Banks/Authorised Dealers (AD).
4.21
In a manner similar to banks, different customer-asset combinations behave very
differently from each other and it is recommended that the regulator specify NPA
recognition and provisioning rules, including for standard assets, at the level of
each asset-class and require that all NBFCs conform to these mandates. [Identical
to Recommendation 4.3 for National Banks]
4.22
Require all NBFCs to have better on-going risk measures. These include disclosure
of their stress test results both at an overall balance sheet level as well as at a
segmental level at least annually. All NBFCs must adopt core banking systems so
that this can enable better off-site supervision. [Identical to Recommendation 4.4
for National Banks]
4.23
Enable better benchmarking by requiring all NBFC-MFIs to disclose their operating
costs (direct and indirect) of a mature branch to the RBI or MFIN once it becomes
an SRO.
4.24
The regulatory focus must be on total indebtedness of the small borrower in
relation to their debt-servicing capacity and not just indebtedness per se or merely
from NBFC-MFIs. Keeping this in mind, the total borrowing limit for the small
borrower segment may be increased immediately to Rs. 100,000 across all lenders,
including bank-lending to this segment. In order to implement this, all lenders to
this segment will need to be mandated to report to the credit bureau as has been
the case with NBFC-MFIs. If total indebtedness is being tracked adequately, the
stipulation of a maximum number of lenders appears redundant and can be
gradually removed as this would also help in creating intensified price competition.
4.25
All policy biases against consumption finance need to be removed. An example of
this is restricting the proportion of consumption finance that is permitted for NBFCMFIs.
4.26
In order to enable the gradual transition of eligible and interested NBFCs to
Wholesale Consumer Banks or Wholesale Investment Banks or National Banks, the
Committee recommends a re-examination of PSL definitions [also see
Recommendation 4.41], creating an active market for PSL assets, assessment of the
relevance of SLR in light of capital adequacy norms, and application of CRR on time
liabilities.
4.27
Under the Banking Regulation Act, a set of banks may be licensed which may be
referred to as Wholesale Banks with the following characteristics:
a. Given that their primary role is lending and not the provision of retail deposit
services, they will only be permitted to accept deposits larger than Rs. 5 crore.
b. Since they could expect to borrow large amounts from other banks, net
liabilities from the banking system will be permitted to be deducted from their
NDTL computation for the purposes of ascertaining their SLR obligations on par
with the treatment currently given for CRR.
13
Executive Summary and List of Recommendations
c. Since other banks are expected to lend large amounts to Wholesale Banks,
those other banks will be permitted to deduct their net assets to the banking
system from the computation of their ANBC (the amounts on which PSL
requirements are to be applied).
d. In view of the fact that they will not take retail deposits, the minimum entry
capital requirement for them will be Rs. 50 crore compared to the Rs. 500 crore
required for full-service SCBs.
e. If the institution has fewer than twenty branches through which it operates, it
will not be required to meet the 25 per cent branching requirement.
Institutions with twenty or fewer branches could be referred to as Wholesale
Investment Banks while those with a larger branch network could be referred to
as Wholesale Consumer Banks.
f. Wholesale Consumer Banks should be permitted to act as BCs for other full
service Banks.
They will be required to comply with all other RBI guidelines relevant for SCBs and
will be granted all the other rights and privileges that come with that licence.
Priority Sector Lending
4.28
All loans given to landless labourers and small and marginal farmers should be
counted as a part of Direct Agriculture and not merely the wages component of a
loan given to a farmer for financing her agricultural production.
4.29
Investment by banks in bonds of institutions must qualify for PSL where wholesale
lending to the same institutions already qualifies under PSL.
4.30
Credit facilities documented as bonds or Pass-Through Certificates (PTC), whether
originated directly or purchased in the secondary markets should be permitted to
be held in the ―banking book‖ of a bank based on declared intent and not merely
based on source or legal documentation. [Identical to Recommendations 4.1(b) and
4.10]
4.31
Investment by banks in the form of non-fund based limits (such as guarantees)
should qualify for PSL to the extent of the credit equivalent amount of the offbalance sheet facility where loans to these categories qualify for PSL. ANBC should
also be adjusted to include such PSL-linked, non-fund based limits.
4.32
Equity investments by banks in complementary infrastructure within the purview of
PSL guidelines, such as rural warehouses, market yards, godowns, silos, and NBFCs
in low financial depth districts. These equity investments should be eligible for
contribution to the overall priority sector lending targets. They should be
permitted where debt already qualifies for PSL but with a multiplier of four, to
reflect the higher risk and the illiquid character of these investments. The benefit
must accrue as long as the equity investment is held by the Bank. This list of
eligible equity investments may be varied from time-to-time. [Identical to
Recommendation 4.44]
4.33
PSL targets should be applicable on the last reporting Friday during the last month
of each quarter in exactly the same manner as it is currently applicable in the
month of March, so as to ensure more timely and continuous credit flow into
14
Executive Summary and List of Recommendations
priority sectors. In order to ensure administrative ease, requirements such as
investment into RIDF can continue to be levied on an annual basis and computed on
the basis of the average of the quarterly requirements.
4.34
If the government does desire to provide relief in any form to the small farmer, it
would be best carried out as a direct benefit transfer (DBT) to the bank account of
the farmer and not through the mechanism of either interest subvention or debt
waiver. This would ensure that the banking system is able to price loans in a
sustainable manner and also protect credit discipline amongst its borrowers.
Adding a universal requirement to report all defaults to credit bureaus would
ensure that the borrower also builds a strong interest in protecting his credit
history, even if he is a recipient of DBTs. [Similar to Recommendations 4.2 and
4.43]
4.35
In order to guard against large scale defaults resulting from catastrophic events,
banks should be permitted to work closely with insurance companies to purchase
bank-wide portfolio level insurance against events such as large scale rainfall
failure on a regional or national basis, instead of having an expectation that relief
would be provided from national or state budgets.
4.36
For the provision of food-credit, Food Corporation of India (FCI) and State
Governments should be required to originate warehouse receipts and raise low-cost
funds in the market against these receipts instead of being reliant only on bank
credit. [Identical to Recommendation 4.46]
4.37
The stipulation that the all-inclusive interest charged to the ultimate borrower by
the originating entity should not exceed the Base Rate of the purchasing bank plus
8 per cent per annum should be removed. [Identical to Recommendation 4.9]
4.38
The RBI should represent to the Government of India to restore the tax-free status
of securitisation SPVs as pass-through vehicles for tax treatment so as to create
pathways for Wholesale Banks to provide liquidity to other Banks and Financial
Institutions directly originating assets in priority sectors. [Identical to
Recommendation 4.11]
4.39
While a market that trades PSL assets will be of critical importance, regulation
should additionally enable the use of risk-free PSL Certificates as a means to
achieving PSL compliance amongst banks that wish to do so.
4.40
In order to enable greater regional and sectoral specialisation among Banks, the
Committee recommends that the RBI revise the PSL targets and require banks to
meet an Adjusted PSL target of 50 per cent against the current requirement of 40
per cent. Districts and sectors are weighted based on the difficulty in lending to
them, and a Bank lending to a difficult sector in a difficult to reach district can
benefit from a multiplier value based on the specific sector and district. Every
sector-district combination has a weight associated with it and the Bank will have
to reach an adjusted PSL value of 50% taking these weightages into account.
4.41
The Committee recommends that RBI seriously examine moving to a new
framework in which two parameters: District level credit depth, and sector and
sub-sector level credit depth be used to determine the sector, sub-sector, and
regional weights which are published every three years. Using these weights banks
would be required to reach an Adjusted PSL target of 150 per cent of ANBC.
15
Executive Summary and List of Recommendations
4.42
There is a need to develop a robust legal and regulatory framework around
customer data generated in various transactions (payments and credit, digital and
off-line), with the objective of customer ownership of their own transactions data
and its use, among others, for signalling credit-worthiness. RBI should constitute a
Working Group comprising TRAI, CERC, and Credit Information Companies to
develop a framework for sharing of data between telecom companies, electrical
utilities, and credit bureaus. This framework should be in keeping with the FSLRC‘s
draft Indian Financial Code which recommends the creation of regulations on the
collection, storage, modification and protection of personal information by
financial services providers; and establishment of mechanisms to ensure that
consumers have access to, and are given an effective opportunity to seek
modifications to, their personal information. [Identical to Recommendation 4.8]
4.43
Universal reporting to credit bureaus should be mandated for all loans, both
individual and SME, but in particular SHG loans, Kisan Credit Card, and General
Credit Card. [Identical to Recommendation 4.2]
4.44
Equity investments by banks in complementary infrastructure within the purview of
PSL guidelines, such as rural warehouses, market yards, godowns, silos, and NBFCs
in low financial depth districts. These equity investments should be eligible for
contribution to the overall priority sector lending targets. They should be
permitted where debt already qualifies for PSL but with a multiplier of four, to
reflect the higher risk and the illiquid character of these investments. The benefit
must accrue as long as the equity investment is held by the Bank. This list of
eligible equity investments may be varied from time-to-time. [Identical to
Recommendation 4.32]
4.45
For the provision of food-credit, Food Corporation of India (FCI) and State
Governments should be required to originate warehouse receipts and raise low-cost
funds in the market against these receipts instead of being reliant only on bank
credit. [Identical to Recommendation 4.36]
4.46
RBI needs to write to each of the State Governments expressing its support for the
recommendations of both the PLATINUM Group and the Rajan Committee (2009)
and urge them to implement those ideas by pointing out the potential benefits to
the expansion of banking and financial activity in their respective states.
4.47
Banks and Financial Institutions should be required to verify the land records of
their clients at the time of making loans and in those states where this is possible,
to insist that transfers take place before a loan can be renewed for a second time.
4.48
Equity investments by banks in private companies engaged in the task of installing
and operating weather stations, or in creating markets for second-hand assets
should be eligible for PSL treatment. These investments should also get a multiplier
of four, to reflect the higher risk and the illiquid character of these investments.
[Also see Recommendation 4.44]
Section 5 examines issues relevant to the goal of universal access to investment and risk
management products. The following recommendations are made in this section:
5.1
Every resident should be issued a Universal Electronic Bank Account (UEBA)
automatically at the time of receiving their Aadhaar number by a high quality,
national, full-service bank. An instruction to open the bank account should be
initiated by UIDAI upon the issuance of an Aadhaar number to an individual over
the age of 18. The bank would need to be designated by the customer from
16
Executive Summary and List of Recommendations
amongst the list of banks that have indicated to UIDAI that they would be willing to
open such an account with the understanding that it would attract no account
opening fee but that the bank would be free to charge for all transactions,
including balance enquiry with the understanding that such transactions‘ charges
would provide the host banks with adequate compensation. The Bank would be
required to send the customer a letter communicating details of the account thus
opened. The Committee recommends that the RBI issue a circular indicating that
no bank can refuse to open an account for a customer who has adequate KYC which
specifically includes Aadhaar. [Identical to Recommendation 3.1]
5.2
RBI should require a strong Proof of Identity (POI) for each and every customer and
a documentary proof of one national address but waive the requirement of
documentary proof for the current address, for the purpose of opening a fullservice bank account. It should instead enjoin upon banks to carry out careful
tracking of usage and transactions patterns to ascertain the risk levels of the
customer and take necessary action based upon risk-based surveillance processes
developed internally by each bank. RBI must take the lead in developing this as a
convergent approach to KYC across all regulators for their respective products.
[Identical to Recommendation 3.2]
5.3
In keeping with the goal of creating integrated providers for financial services
delivery, RBI should publish a guideline towards the appointment of entities
regulated by it, including National Banks, Regional Banks, or NBFCs, as agents. This
guideline should set out the following eligibility criteria for agents:
a. The Agent must not have been subjected to any disciplinary proceedings under
the rules, regulations and bye-laws of a stock exchange, SEBI, RBI, IRDA, FMC,
or any other regulator with respect to the business involving either
organisation, partners, directors, or employees;
b. All Agents must be required to commit some capital against operating risks and
customer protection risks for the business that they are engaged in. While the
minimum amount may be structured as a Rs. 5 lakh security deposit from the
agent, the amount may vary depending on the number of customers and volume
of transactions;
c. There must be suitable limits on cash holding as also limits on individual
customer payments and receipts;
d. Transactions should be accounted for and reflected in the Principal‘s books by
end of day or next working day. Where the transfer of money from agent to
Principal happens on the next working day, there should also be a stipulation
that the agent should transfer the day‘s collections to a non-operative pooled
collections account on the same day itself. To ensure this, the Agent has to
maintain the account with a bank which has online fund transfer facility with
standing instructions to transfer the funds to the designated pool account at
the end of each day. This ensures that the clients‘ funds are secure even if the
agent goes bankrupt;
e. To counter the risk of repudiation of transactions, RBI should insist that every
transaction be initiated by the customer. Biometric authentication can help
achieve this. The log of each transaction must be maintained at the agent
level. Each transaction must carry a transaction number and customer must
receive the transaction receipt at the time of the transaction;
17
Executive Summary and List of Recommendations
f. The Agent must have trained staff that can communicate with the clients about
the details of the products and take full responsibility for communicating with
the clients. The Agent must have a comprehensive human resource policy,
including an incentive plan for staff that not only encourages them to achieve
the business objectives but more importantly prevents mis-selling;
g. The Agent should adopt the Suitability principles of the RBI as well as those of
the Principal‘s regulator. The Agent should also have a mechanism to address
queries and grievance of the customer about the services rendered by it and
publicise it widely through electronic and print media. All customer grievances
should be addressed within a defined time frame.
RBI could then request each regulator to follow this integrated approach to Agent
appointment for its respective products.
Section 6 examines issues in customer protection. The following recommendations are
made in this section:
6.1
The RBI should issue regulations on Suitability, applicable specifically for individuals
and small businesses, to all regulated entities within its purview, i.e., banks, NBFCs
and payment institutions (under Sections 35 A of the BR Act, Section 45 JA of the RBI
Act and Section 38 (2) of the Payments and Settlement System Act, 2007); so that
the violation of such regulations would result in penal action for the institution as
contemplated under the aforesaid statutes through a variety of measures, including
fines, cease-and-desist orders, and modification and cancellation of licences. These
regulations should be applicable specifically for individuals and small businesses
defined under the term ―retail customer‖ by FSLRC. FSLRC defines a retail customer
as ―an individual or an eligible enterprise, if the value of the financial product or
service does not exceed the limit specified by the regulator in relation to that
product or service.‖ Further, an eligible enterprise is defined as ―an enterprise that
has less than a specified level of net asset value or has less than a specified level of
turnover.‖ All financial firms regulated by the RBI would be required to have an
internal process to assess Suitability of products prior to advising clients with regard
to them. The RBI would provide the following guidance with regard to the internal
compliance requirements for firms regarding Suitability:
a. The Board should approve and oversee the procedures put in place for Suitability
on an annual basis and attempt to detect and correct any deviations from
procedure.
b. The firm would have to carry out a limited due diligence of the customer and put
in place a process to assess the appropriateness of any product offered to a
customer based on the results of the diligence. With respect to credit, for
instance, the firm could be obliged to check the borrower‘s information from
credit bureaus to determine the current level of indebtedness, make reasonable
attempts to determine the current and projected income of the borrower,
financial capacity, objectives and risk tolerance of the borrower, to determine
the repayment capacity of the borrower. The lender should seek appropriate
documentation to evaluate income and the ability of the borrower to repay given
the increasing interest rates of the loan.
c. The requirement to conduct a due diligence should include the requirement to
obtain relevant information about the customer‘s personal circumstances and
18
Executive Summary and List of Recommendations
give advice or recommendations based on due consideration of the relevant
personal circumstances. If the financial firm finds that the information is
inaccurate or incomplete, the customer must be warned.
d. Any product may be offered to customers upon establishing its Suitability, except
―globally unsuitable‖ products discussed in (m).
e. In the event a customer chooses to purchase a product considered unsuitable to
the customer, the financial services provider should consider providing written
advice to the customer and seeking acknowledgement from the customer. This
should however, not be misused by the financial services provider.
f. The firm‘s internal rules relating to compensation packages of staff should not
create incentives or otherwise promote inappropriate behaviour. In addition,
requirements relating to Suitability and appropriateness should be embedded
into compensation packages. Accordingly, the compensation packages and
incentive structures should not be based solely on numerical targets but should
include qualitative aspects such as offering appropriate products and services to
customers and complying with requirements of the internal policy relating to
Suitability etc.
g. The firms should have internal processes to track compliance with Suitability and
an internal process to detect and correct any deviations from the policy,
including potential disciplinary action and sanctions for the staff for any
deviations. This could include a customer audit committee which reports to the
board that is responsible for determining compliance with the Suitability process
and other customer protection initiatives of the financial services provider.
h. The firm must have internal grievance redressal mechanisms for non-compliance
with process and this should be required to be communicated to customers as
well. The customers, should however be made aware that it is the process that is
guaranteed and not the outcome. An internal grievance redressal process would
not, however, preclude a customer from proceeding against the firm in any other
forum.
i. The internal policy and procedure of the board should be communicated across
the organisation and appropriate training programs should be put in place for the
staff- both the client facing and the control staff. Such communication should
articulate inter alia (a) the business benefits of having Suitability requirements,
(b) the firm‘s commitment to a zero-tolerance approach to follow the process,
and (c) the consequences for the breach.
j. The firms should have a paper trail and record keeping procedures to
demonstrate compliance with its internal procedures which should be available
for inspection by the RBI.
k. Additionally, if gross negligence, fraud or wilful misconduct can be established
on the part of the financial services provider, the adherence to the process will
not be sufficient and the firm would be liable to be penalised regardless of the
process.
l. The regulations should additionally protect the firm from penal action in a
situation where the customer may have deliberately misled or misrepresented to
19
Executive Summary and List of Recommendations
the firm, or if despite reasonable attempts the firm was unable to assess
Suitability.
m. In addition, specific products may be deemed as ―globally unsuitable‖ and would
not be eligible to be offered to households or businesses below a certain income
threshold or net worth or individuals above a certain age. Such products should
be prescribed by the RBI and could be amended from time to time based on
feedback from customers and financial services providers.
n. There is a specific set of de minimis products, the offer of which is to be
subjected to a limited application of the Suitability requirements - basic bank
accounts, the universal electronic bank account recommended in the Report and
credit below Rs. 5000 subject to ascertaining the income and repayment capacity
of the borrower. However, the Suitability process should definitely apply if an
insurance, investment or derivative product is being offered to a customer,
whether on a standalone basis or bundled along with credit.
6.2
The Committee recommends that a unified Financial Redress Agency (FRA) be
created by the Ministry of Finance as a unified agency for customer grievance
redress across all financial products and services which will in turn coordinate with
the respective regulator. The FRA should have a presence in every district in the
country and customers should be able to register complaints over the phone, using
text messages, internet, and with the financial services provider directly, who
should then be required to forward the complaint to the redressal agency. The
customers should have their complaints resolved within 30 days of registration of the
complaint with the FRA.
6.3
The RBI should create a system using which any customer can effortlessly check
whether a financial firm is registered with or regulated by RBI. Customers should be
able to access this service by phone, through text-messages or on the internet. Once
the FRA comes into being, this system should be subsumed under the FRA and be
available for firms registered under all regulators.
Section 7 examines issues relevant to measurement and monitoring of comprehensive
access to financial services. The following recommendations are made in this section:
7.1
RBI should mandate all formal providers of financial services to households and
small businesses to report data on a quarterly basis at the level of each one of
their access points such as branches, outlets, BCs, ATMs, and POS terminals, as
applicable. This includes data on geo-spatial location, access, services offered,
quantum of transactions, depth of penetration, and application of Suitability
process. This data should be verified periodically by the RBI using standardised
quality control and follow up visits conducted by trained enumeration field teams
within randomly selected sub samples.
7.2
In order to measure access, usage, and affordability of financial services, RBI
should mandate two surveys of consumers to gain a more accurate picture of
progress towards achieving the desired outcomes outlined by the vision statements.
The Financial Access & Usage Survey should be a nationally representative survey
of consumers undertaken annually to collect data on access and usage of financial
services and can be incorporated as additional modules in nationally representative
surveys that are being undertaken for other purposes by institutions such as the
National Sample Survey Organisation (NSSO) and the Centre for Monitoring Indian
Economy (CMIE). The Cost & Return Survey should be a nationally representative
20
Executive Summary and List of Recommendations
survey of consumers undertaken triennially to collect data on costs of credit,
insurance and investment products, as well as returns on deposits and investment
products. For this survey, RBI should commission institutions which have
appropriate capacity and expertise in conducting such nationally representative
surveys with the required academic rigour.
21
Section 2
Vision Statements and Design Principles
Vision Statements
Chapter 2.1
Vision Statements
Providing access to high-quality financial services to all sectors of the economy, including
low-income households and small businesses is a key goal of financial sector policy. This is
motivated by the fact that; (a) there are well documented links between the extent of
financial development and economic growth; (b) the depth and breadth of financial
services access in the country could impinge materially on the conduct of monetary policy
and the ability of the regulators to balance between inflation, growth, and unemployment
concerns; and (c) development of market infrastructure such as payment systems has the
ability to improve the efficiency of all firms and of the interaction of government with
citizens. Given these inter-relationships, it is entirely legitimate for financial regulators to
lay down financial depth and inclusion objectives that they need to facilitate and track,
keeping in mind the broader perspective that any actions that they take must not impair
the efficiency, effectiveness and stability of the financial system. In the event that there
are explicit costs that have a pure redistributional character they must be borne explicitly
by the government and not by the financial system. The report of the Rajan Committee
(2009) placed ―inclusion, growth, and stability as the three objectives of any reform
process‖5 and in the specific context of inclusion had expressed the hope that 90 per cent
of Indian households should have a deposit account by the end of 20116.
Given the focus of this Committee‘s tasks, the very first term of reference for this
Committee is to, ―Frame a clear and detailed vision for financial inclusion and financial
deepening in India‖. The intent of these vision statements is to provide specific
benchmarks to regulators to assess the quality of financial inclusion and deepening
obtained in India. The Committee has gone about this task keeping in view the following
four guidelines:
1. The vision should be sufficiently sharp to serve as a guide to action but also have the
flexibility to adapt to the changing needs of the Indian economy.
2. The vision must be focussed on outcomes and be agnostic towards the specific
institutional designs that deliver the eventual results. Advances in technology and
financial markets are rapidly changing the nature of institutions.
3. The vision must be ambitious given the magnitude of the un-served population in India
but it must also take cognizance of the ground-realities while thinking about near-term
milestones.
4. The vision must not restrict itself to national aggregates. The provision of an increased
quantum of comprehensive financial services in every region, sector and segment of
the economy needs to be articulated wherever relevant, while framing the vision.
25
Vision Statements
Vision Statements for Financial Inclusion and Financial Deepening in India
1. Universal Electronic Bank Account (UEBA): By January 1, 2016 each Indian
resident, above the age of 18 years, would have an individual, full-service7, safe8,
and secure9 electronic bank account.
This vision implies that at least 50 crore new, unique accounts are created by January
1, 2016. This is the date by which the Unique ID Authority of India (UIDAI) and the
National Population Register (NPR) expect to substantially complete the task of issuing
an Aadhaar number to every resident. The Aadhaar number and other forms of
identification would have, between them, by then ensured that every citizen has
adequate documentation. The Committee believes that in the presence of such
documentation, the customer has the right to receive a bank account. The Reserve
Bank of India (RBI) should put in place processes designed to ensure that such an
account is indeed made available to every Indian resident above the age of 18 years by
January 1, 2016.
The Committee recognises that ―legal incapacity‖ imposed upon an individual by virtue
of age or mental disability represents an enormous challenge that needs to be
addressed. This is however a complex matter which would need to be examined by a
group of experts before any specific approach towards addressing this issue can be
recommended.
2. Ubiquitous Access to Payment Services and Deposit Products at Reasonable
Charges: By January 1, 2016, the number and distribution of electronic payment
access points would be such that every single resident would be within a fifteen
minute walking distance from such a point anywhere in the country. Each such
point would allow residents to deposit and withdraw cash to and from their bank
accounts and transfer balances from one bank account to another, in a secure
environment, for both very small and very large amounts, and pay “reasonable”
charges for all of these services. At least one of the deposit products accessible to
every resident through the payment access points would offer a positive real rate
of return over the consumer price index.
Ensuring that these transaction points are within a fifteen minute walking distance for
every resident would require that each square kilometre patch with at least 400
people would have 1 such point. The Committee believes that by January 1, 2016 it
should be possible to ensure that 100 per cent of all such clusters, containing 400
people, have 1 transaction point.
3. Sufficient Access to Affordable Formal Credit: By January 1, 2016, each lowincome household and small-business would have “convenient” access to formally
regulated lenders that have the ability to assess and meet their credit needs, and
offer them a full-range of “suitable” credit products, at an “affordable” price. By
that date, each District and every “significant” sector (and sub-sector) of the
economy would have a Credit to GDP ratio of at least 10 per cent. This ratio would
increase every year by 10 per cent with the goal that it reaches 50 per cent by
January 1, 2020
―Convenient‖ access to lenders would imply that at the level of every urban and rural
centre, with a population of 10,000, there should be at least one formal lender
physically present with the ability and willingness to provide a complete range of loan
products, including short-term loans, long-term loans, and working-capital loans, both
26
Vision Statements
on a secured and an unsecured basis for small businesses. In the context of a
household this would include crop loans, loans to assist with consumption smoothing,
housing loans, and education loans.
The Committee recognises the need for affordable credit even while acknowledging
that pricing would vary depending on the underlying risk of the specific segment and
cost-to-serve considerations. Given the high level of entry barriers and small size of
the banking system, the price to the customer often varies significantly from what
such considerations would imply. Therefore, strategies would have to be developed to
address this concern and ensure that the price differentials between identically rated
credit risks are minimal.
A growing body of empirical research produces a remarkably consistent narrative that
the services provided by the financial system, especially credit, exert a first-order
impact on long-run economic growth and poverty. For instance, an impact study of
bank branches in rural India shows that output increased and poverty declined with
greater access to finance10. Studies11 have found that a 10 percentage point increase in
the private credit-to-GDP ratio reduces the percentage of population in poverty by 2.53 percentage points. Cross-country analysis show that Gini coefficients (income
inequality) fall more rapidly in countries with more developed financial intermediaries
like banks and insurance companies. It has been estimated that with higher levels of
financial development, the income of the poorest 20 per cent of the population grows
faster than the national average and that the population under poverty falls rapidly12.
Further, financial development facilitates economic growth based on the rationale
that financial development reduces the costs of external finance to firms. Studies have
found that in a large sample of countries over the 1980s, industrial sectors that are
relatively more in need of external finance develop disproportionately faster in
countries with more-developed financial markets13.
Data from the World Development Indicators14 shows that by 2012 high income
countries had attained an average Credit to GDP ratio of close to 200 per cent; middleincome countries 100 per cent (with China having crossed 150 per cent); low-income
countries 40 per cent; and India as a whole 75 per cent. Based on this data and the
arguments regarding the importance of credit deepening presented earlier, the
Committee felt that while India as a whole may over time plan to take her credit to
GDP ratio to a number above 100 per cent, in order to ensure that the absence of
credit does not choke off the growth potential of an entire region of the country or a
significant sector of the economy, a minimal credit to GDP ratio of 50 per cent by the
year 2020, just above that already reached by even low-income countries, would be a
reasonable one to aspire for.
4. Universal Access to a Range of Deposit and Investment Products at Reasonable
Charges: By January 1, 2016, each low-income household and small-business would
have “convenient” access to providers that have the ability to offer them
“suitable” investment and deposit products, and pay “reasonable” charges for
their services. By that date, each District would have a Total Deposits and
Investments to GDP ratio of at least 15 per cent. This ratio would increase every
year by 12.5 per cent with the goal that it reaches 65 per cent by January 1, 2020.
It is envisaged that convenient access to deposit and investment products would be
provided by a combination of payment access points and credit access points.
Starting with an aspiration of a 10 per cent credit to GDP ratio for each district and
assuming a starting credit to deposit ratio of 67 per cent (which is close to the current
number), a 15 per cent deposit to GDP ratio appears reasonable as a minimal
27
Vision Statements
aspiration. The credit to deposit ratio is already showing an upward trend, therefore if
the credit to GDP ratio does indeed cross 50 per cent in every district of India by
January 1, 2020, it would be reasonable to apply a credit to deposit ratio of 77 per
cent to arrive at an equivalent deposit to GDP aspiration of 65 per cent by that date.
5. Universal Access to a Range of Insurance and Risk Management Products at
Reasonable Charges: By January 1, 2016, each low-income household and small
business would have “convenient” access to providers that have the ability to offer
them “suitable” insurance and risk management products which, at a minimum
allow them to manage risks related to: (a) commodity price movements; (b)
longevity, disability, and death of human beings; (c) death of livestock; (d) rainfall;
and (e) damage to property, and pay “reasonable” charges for their services. By
that date, each District would have a Total Term Life Insurance Sum Assured to
GDP ratio of at least 30 per cent. This ratio would increase every year by 12.5 per
cent with the goal that it reaches 80 per cent by January 1, 2020.
It is envisaged that convenient access to insurance and risk management products
would be provided by a combination of payment access points and credit access points.
A comparison with global averages of level of protection, measured as the ratio of the
sum assured to GDP reveals that while this ratio is 58 per cent for India, it is much
higher in other countries like the USA (191 per cent), Germany (105 per cent), France
(97 per cent), South Korea (152 per cent) and Japan (321 per cent)15. From a field
perspective, the average GDP for a Gram Panchayat in India is estimated to be about
Rs.12 crore16 and the total Human Capital requiring coverage for an average rural
household is about Rs. 3.5 lakh17. Assuming that the average population of a Gram
Panchayat is 3,00018 (or 600 households), the Total Sum Assured required to cover the
human capital of all earning members of the Gram Panchayat population is Rs. 21
crore. This implies that in order to cover the entire human capital of a Gram
Panchayat, the Sum Assured to GDP ratio will be in the region of 175 per cent. As
against this requirement, and in view of global benchmarks, the Committee believes
that it is a reasonable goal to reach a Term Life sum assured to GDP ratio of 30 per
cent by January 1, 2016, going up to 80 per cent over five years for each District.
6. Right to Suitability: Each low-income household and small-business would have a
legally protected right to be offered only “suitable” financial services. While the
customer will be required to give “informed consent” she will have the right to
seek legal redress if she feels that due process to establish Suitability was not
followed or that there was gross negligence.
The ―caveat emptor‖ principle that has underpinned India‘s customer protection
architecture has not created desired outcomes. The Committee believes that India
needs to move to a customer protection regime where the provider ascertains through
due process that the products sold or the advice given is suitable for the buyer
considering her needs and current financial situation.
In addition, customers would also have ease of recourse to ex-post grievance redressal
mechanisms. This would mean that they have access to a unified platform for
grievance redressal across financial products and services. The grievance redressal
agency would have a presence in every District in the country and customers would be
able to register complaints over the phone, using text messages, internet, and with
the financial services provider directly, who would then be required to forward the
complaint to the redressal agency. The customers would have a right to speedy
redressal of grievances and the right to appeal decisions of the redressal agency.
28
Vision Statements
In summary, the six vision statements for financial inclusion and deepening refer to:
1.
2.
3.
4.
5.
6.
A Universal Electronic Bank Account.
Ubiquitous Access to Payments and Deposit Products at Reasonable Charges.
Sufficient Access to Affordable, Formal Credit.
Universal Access to Investment Products at Reasonable Charges.
Universal Access to Insurance and Risk Management Products at Reasonable Charges.
Right to Suitability.
The goals laid out by these six vision statements and the desired outcomes for each of
them are summarised below.
#
1
2
3
Vision
A Universal Electronic
Bank Account
Ubiquitous Access to
Payment Services and
Deposit Products at
Reasonable Charges
Sufficient Access to
Affordable Formal
Credit
Table 2.1.1
Vision, Goal and Desired Outcome
Goal
Each Indian resident, above the age
of 18
Full services access point within a
fifteen minute walking distance
from every household in India
Reasonable Charges
At least one product with positive
real returns
Credit to GDP Ratio in every District
of India
Credit to GDP Ratio in every District
of India
Credit to GDP Ratio for every
―significant‖ sector of the economy
Credit to GDP Ratio for every
―significant‖ sector of the economy
Convenient Access
Affordable Rates
4
5
6
Universal Access to a
Range of Deposit and
Investment Products
at Reasonable Charges
Universal Access to a
Range of Insurance
and Risk Management
Products at
Reasonable Charges
Right to Suitability
Deposit & Investments to GDP Ratio
in every District of India
Deposit & Investments to GDP Ratio
in every District of India
Reasonable Charges
Total Term Life Sum Assured to GDP
Ratio in every District of India
Total Term Life Sum Assured to GDP
Ratio in every District of India
Reasonable Charges
All financial institutions to have a
Board approved Suitability Policy
Presence of district level redressal
offices for all customers availing any
financial service
Desired Outcome
100% by January 1, 2016
Density of 1 per sq.km (with
more than 400 people), across
the country, by January 1,
2016.
Reasonable Charges
By January 1, 2016
10% by January 1, 2016
50% by January 1, 2020
10% by January 1, 2016
50% by January 1, 2020
Density of 1 per 10,000 people,
across the country, by January
1, 2016
Ordinal by risk level in the
long-run after adjusting for
―reasonable‖ transactions
charges
15% by January 1, 2016
65% by January 1, 2020
Reasonable Charges
30% by January 1, 2016
80% by January 1, 2020
Reasonable Charges
100% by January 1, 2016
100% of districts by January 1,
2016
29
Vision Statements
The rest of the report articulates a set of principles that will guide the choice of one of
more financial systems designs and recommends several specific strategies to achieve this
vision and monitor the progress on achieving it.
30
Review of Current Status
Chapter 2.2
Review of Current Status of Financial Inclusion and Financial Deepening
This chapter reviews the achievements of the Indian financial system so far, against each
of the vision statements.
Vision 1: Universal Bank Account (UEBA): By January 1, 2016 each Indian resident, above
the age of 18 years, would have an individual, full-service, safe, and secure electronic
bank account.
Goal: 100 per cent achievement of the vision by January 1, 2016.
Current Status: The institutions that currently provide bank accounts include Scheduled
Commercial Banks, Urban Cooperative Banks, Regional Rural Banks, and State and District
Cooperative Banks. While available data provides an overall sense of savings bank account
spread, it is not clear how many of these accounts are unique accounts as this data is not
captured currently. Figures19 2.2.1a and 2.2.1b provide an estimated number20and
proportion of bank accounts available at a District level to urban and rural Indian residents
respectively at the end of March 31, 2012.
Figure 2.2.1
Estimated % of population with bank accounts in urban and rural areas for various districts of India
2.2.1a Urban
2.2.1b Rural
This estimation yields a result of 36 per cent at an All-India level (which is commensurate
with data from the World Bank Findex Survey which indicates that 35 per cent of the
target population in India have at least one bank account21). It can be seen from the above
data that the situation in both urban and rural India is very grim overall with only 45 per
cent of the urban residents and 32 per cent of the rural residents having bank accounts.
There is also significant variation from district to district even within that. In an urban
context the current penetration of individual bank accounts, as proportion of the
population of people above the age of 18 years, ranges from 10 per cent in Imphal East
district of Manipur to 688 per cent in Wayanad district of Kerala, while in the rural context
it ranges from close to 0 per cent in the districts of Nagaland to 89 per cent in Solan in
31
Review of Current Status
Himachal Pradesh. And, even where there is good progress on this front, a large
proportion of the bank accounts do not have full-service electronic capabilities.
Vision 2: Ubiquitous Access to Payment Services and Deposit Products at Reasonable
Charges: By January 1, 2016, the number and distribution of electronic payment access
points would be such that every single resident would be within a fifteen minute walking
distance from such a point anywhere in the country. Each such point would allow residents
to deposit and withdraw cash to and from their bank accounts and transfer balances from
one bank account to another, in a secure environment, for both very small and very large
amounts, and pay ―reasonable‖ charges for all of these services. At least one of the
deposit products accessible to every resident through the payment access points would
offer a positive real rate of return over the consumer price index.
Goal: A density of 1 access point per sq.km, with more than 400 people, across the
country by January 1, 2016; ―reasonable‖ charges; at least one deposit product with
positive real-returns by January 1, 2016.
Current Status: Payment access points currently include bank branches, active business
correspondent locations, and Automated Teller Machines (ATMs)22. There are also 8.45
lakh merchant Point-Of-Sale (POS) terminals in the country as on the end of March 201323.
Almost all of these are operational in the urban areas and while they are not yet fullservice since they do not have remittance and cash-in capabilities and limited cash-out
capabilities (regulation permits only up to Rs. 1,000), they have a density of 25 per 10,000
in urban areas and could be permitted to offer a wider range of payments services to their
consumers. Keeping this in mind, Figures 2.2.2a and 2.2.2b provide an estimated24
distribution of all these access points including POS terminals at the District level for
urban and rural areas respectively per 10,000 eligible persons (population aged 18 and
above).
While exact data is not available at the level of detail that is required, it is clear from the
Figures 2.2.2a and 2.2.2b that against an aspiration of 100 per cent of the populationgroupings of 400 people each having 1 or more payment access points, the data available
enables calculation only up to a district level. Using this data, it can be observed that
while 89 per cent of districts have 25 or more payment access points per 10,000
population in urban areas, only 3 per cent of districts have the same in rural areas.
However, with small-format retailers25, and mobile-recharge operators, each operating
with a density of more than 10 per 10,000, if there is a way to also include even a portion
of them within the payments access networks, it should be possible to expand this number
considerably and reach the goal of having 25 such points in each and every part of the
country (and thus one point per sq.km with more than 400 population).
32
Review of Current Status
Figure 2.2.2
Distribution of Payment Access Points per 10,000 eligible persons
2.2.2a Urban
2.2.2b Rural
As far as charges for the use of these services are concerned a very wide range prevails, as
given in Table 2.2.1, with post offices for example, charging 5 per cent for their
remittance services26 and banks offering them for free for certain classes of their
customers. Pre-paid Instrument Providers such as Airtel Money charge between 0.5 per
cent and 3 per cent for their services27.
Table 2.2.1
Indicative cost of transaction to the customer for a domestic
remittance of Rs.5,000 through various channels
Money Order, India Post
0.5%
Business Correspondent of SBI
2.0%
Airtel Money
0.5%
It can be seen from Table 2.2.228 on interest rates offered by banks in India, there is
currently no product that offers a positive real rate of return on deposits.
Table 2.2.2
Interest Rates Offered on Deposits on November 29, 2013
Maturity
Nominal Rate
Inflationary Expectation
Savings deposit rate
4.00%
11.24%
Real Rate
-7.24%
Term deposit rate >1 year
9.05%
11.24%
-2.19%
Fixed deposit for 360 days
7.50%
11.24%
-3.74%
Fixed deposit for 720 days
9.00%
11.24%
-2.24%
Vision 3: Sufficient Access to Affordable Formal Credit: By January 1, 2016, each lowincome household and small-business would have ―convenient‖ access to formally
regulated lenders that have the ability to assess and meet their credit needs, and offer
33
Review of Current Status
them a full-range of ―suitable‖ credit products, at an ―affordable‖ price. By that date,
each District and every ―significant‖ sector (and sub-sector) of the economy would have a
Credit to GDP ratio of at least 10 per cent on January 1, 2016. This ratio would increase
every year by 10 per cent with the goal that it reaches 50 per cent by January 1, 2020.
Goal: A Credit to GDP ratio of 10 per cent by January 1, 2016, increasing by 10 per cent
every year until it reaches 50 per cent by January 1, 2020, in every District of the country
and every ―significant‖ sector of the economy. Full-service credit access points to have a
density of 1 per 10,000 people, across the entire country, by January 1, 2016. And, in the
long run, higher rated credits to have a lower rate of interest than lower rated ones after
adjusting for ―reasonable‖ transactions charges.
Current Status: Figures 2.2.3a and 2.2.3b provide an estimate29 at a District level for
distribution of credit access points in urban and rural areas respectively for 10,000 eligible
persons.
Figure 2.2.3
State-wise distribution of Credit Access Points per 10,000 eligible persons
2.2.3a Urban
2.2.3b Rural
While exact data is not available at the level of detail that is required, it is clear from the
above Figures that against an aspiration of 100 per cent of the population-groupings of
10,000 people each having at least 1 credit access point, at a District level, 99 per cent of
such groupings within urban areas have at least 1 credit access point, and in rural areas
this figure is 92 per cent. While this looks very positive on an overall basis, this will need
to be verified using more exact data and, particularly the level of activity of Primary
Agricultural Cooperative Societies (PACS) and the range of products they are able to offer.
If the PACS access points are removed from the analysis, the picture changes substantially,
as in Figure 2.2.3c.
34
Review of Current Status
Figure 2.2.3c
State-wise distribution of Rural Credit Access
Points per 10,000 eligible persons
(without PACS)
From an earlier estimate of 92 per cent of population-groupings of 10,000 people each in
rural areas having at least 1 credit access point, this figure now becomes 59 per cent when
PACS are excluded.
Figures 2.2.4a and 2.2.4b give an estimated30 district-wise break-up of credit to GDP ratios
for urban and rural areas respectively.
Figure 2.2.4
Estimated Credit to GDDP ratios for districts of India
2.2.4a Urban
2.2.4b Rural
35
Review of Current Status
While exact data at the level of the District is not available and neither is the rural-urban
break-up of that District level data, it is clear from the above figures that there is an
extremely wide variation in the achievement levels. While about 94 per cent of the
districts‘ urban areas have in excess of 10 per cent credit to GDP ratio, only 18 per cent of
them are currently above the eventual target mark of 50 per cent. The situation in rural
areas is much worse with only 30 per cent of the districts‘ rural areas currently having in
excess of 10 per cent credit to GDP ratio with a mere 2 per cent of the districts above the
eventual target mark of 50 per cent. This analysis reveals that despite a reasonable
number of access points, financial depth indicators are lagging.
In terms of sectoral allocation of credit, Table 2.2.331 indicates the differences in
outstanding bank credit allocation with respect to the sectors‘ contributions to GDP.
Table 2.2.3
Credit to GDP for sectors that contribute 1% or more to GDP, 2012-13
Sectoral GDP (Rs. Crore)
Credit to
GDP
GDP at Current prices, 2012-13
93,21,638
Sectoral Credit (Rs. Crore)
Gross Bank Credit of
Scheduled
Commercial Banks
48,61,345
Of which,
GDP of Agriculture and allied
activities
16,44,834
Credit to Agriculture
5,89,914
35.9%
GDP of Industry
24,36,502
Credit to Industry
22,30,182
91.5%
GDP of Services
GDP contribution of Industry
MSMEs
GDP contribution of Service
MSMEs
52,40,302
Credit to Services
Credit to Industry
MSMEs
Credit to Service
MSMEs
20,41,249
39.0%
2,84,348
55.7%
2,77,947
25.3%
5,10,473
10,97,899
52.0%
It is clear from Table 2.2.332 that agriculture still has a distance to go before it reaches
the 50 per cent depth mark even though it is above the 10 per cent mark. Industry MSMEs
appear to have just above 50 per cent financial depth, while Service MSMEs have a much
lower depth, at 25 per cent, and have a long way to go to reach the 50 per cent
benchmark. This is corroborated by a micro-study of Bangalore Urban District conducted
by Jana Foundation for the Committee which revealed that even though 70 per cent of
micro-enterprises have a bank account, only 5 per cent have access to term loans and a
mere 1 per cent has access to working capital loans from banks.
The goal of affordability has been interpreted to mean that clients with similar risk
profiles should be able to access credit at similar rates after adjusting for ―reasonable‖
levels of transactions charges. Gold loans are the lowest risk category of consumer loans.
Table 2.2.4a33 provides a comparison of the spread on these loans depending on the
channel that is used. Table 2.2.4b34 carries out a similar exercise for a broader category of
loans.
Customer Class
Able to Access Bank
Table 2.2.4a
Gold Loans
Loan-toInterest Rate
Value
80%
12%
LTV Adjusted
Interest Rate35
12%
Spread to Risk
Free Rate36
3.23%
Able to Access NBFC
60%
24%
32%
23.23%
Unable to Access Bank or NBFC
80%
65%
65%
56.23%
36
Review of Current Status
Customer Class
Personal Loan Borrower
SHG Borrower
JLG Borrower
Money Lender Borrower
Home Loan Borrower
Table 2.2.4b
Other Loans
Expected
Interest Rate
Loss Rate37
5.80%
7.08%
0.40%
0.40%
0.43%
18.00%
24.00%
26.00%
65.00%
10.30%
Adjusted Interest
Rate net of
expected loss
12.20%
16.92%
25.60%
64.60%
9.87%
Spread to Risk
Free Rate38
3.35%
8.07%
16.75%
55.75%
1.02%
From the two Tables it is clear that for a variety of reasons, which could include very high
transactions costs, mispricing of credit risks, and differences in the cost of funds faced by
different channels, even in the formal system there is a large distance to travel before the
goal of ordinality can be satisfied.
Vision 4: Universal Access to a Range of Deposit and Investment Products at Reasonable
Charges: By January 1, 2016, each low-income household and small-business would have
―convenient‖ access to providers that have the ability to offer them ―suitable‖ investment
and deposit products, and pay ―reasonable‖ charges for their services. By that date, each
District would have a Total Deposits and Investments to GDP ratio of at least 15 per cent.
This ratio would increase every year by 12.5 per cent with the goal that it reaches 65 per
cent by January 1, 2020.
Goal: A Deposit & Investments to GDP ratio of 15 per cent by January 1, 2016, increasing
by 12.5 per cent every year until it reaches 65 per cent by January 1, 2020, in every
district of the country.
For these services it is envisaged that a combination of Payment Access points and Credit
Access points would be able to provide ―convenient‖ access points.
Current Status: Figures 2.2.5a and 2.2.5b give an estimated district-wise break-up of
Deposit to GDP ratios for urban and rural areas respectively39. These deposits are the sum
of savings, current and term deposits in banking institutions.
While exact data at the level of the District is not available and neither is the rural-urban
break-up of that District level data, it is clear from the figure below that there is an
extremely wide variation in the achievement levels. While 99 per cent of the districts‘
urban areas have in excess of 15 per cent Deposit to GDP ratio, only 35 per cent of them
are above the eventual target mark of 65 per cent. The situation in rural areas is much
worse with only 36 per cent of the districts‘ rural areas having in excess of 15 per cent
Deposit to GDP ratio with only 4 per cent being above the eventual target mark of 65 per
cent.
37
Review of Current Status
Figure 2.2.5
Estimated Deposits to GDDP ratios for districts of India
2.2.5a Urban
2.2.5b Rural
For Mutual Funds and investments into Provident Funds, Pension Funds, and various plans
of Insurance Companies, while the detailed break-ups are not available, Table 2.2.540
gives the relevant ratios for each at the national level. Most of these amounts are likely to
be concentrated in the urban areas (with the exception of postal savings) and may not
change any of the above mentioned percentages significantly.
Table 2.2.5
Retail investments in other significant channels
Channel
Investment Corpus /
As a % of GDP for
AUM
the year
Schemes offered at India
Rs.6,05,697 Crore
7.315%
Post
Employees Provident Fund
Rs.3,73,645 Crore
4.513%
NPS
Rs.29,852 Crore
0.316%
Mutual Funds (Retail)
Rs. 1,52,483 Crore
1.612%
Table 2.2.641 gives the approximate charges that are payable by a customer when she
invests in a number of investment options.
Scheme
Savings
Account
Fixed
Deposit
Money
Market
Mutual Fund
Table 2.2.6
Transactions Costs for other Saving and Investment options
Amounts
Charges
For BSBDA, there is no minimum balance
requirement.
1% on an account balance of
For Savings Accounts, banks can decide minimum
Rs.10,000
balance
Minimum Rs.1,000
Nil
UTI Money Market Fund requires a minimum
investment of Rs. 10,000
Up to 4% for an investment of
Rs.10,000
38
Review of Current Status
Index Mutual
Fund
The Quantum Index Fund (Liquid Fund) requires a
minimum investment of Rs. 5,000
Up to 4% for an investment of
Rs.10,000
Pension Fund
NPS-Lite
Up to 0.86% for contribution
of Rs.10,000
Nil
Public
Provident
Fund
Endowment
Policy
Rs.500 to Rs.100,000 per financial year, to be
locked in initially for 15 years
An indicative number is Minimum of Rs.20,000 per
annum for LIC‘s Endowment Plus Unit Linked Plan
Up to 11.9% in the 1st year
for an investment of
Rs.20,000
From the Table 2.2.6 it can be seen that even for very standardised products, the costs of
transactions vary a great deal and can be extremely high in certain cases.
Vision 5: Universal Access to a Range of Insurance and Risk Management Products at
Reasonable Charges: By January 1, 2016, each low-income household and small business
would have ―convenient‖ access to providers that have the ability to offer them ―suitable‖
insurance and risk management products which, at a minimum allow them to manage risks
related to: (a) commodity price movements; (b) longevity, disability, and death of human
beings; (c) death of livestock; (d) rainfall; and (e) damage to property, and pay
―reasonable‖ charges for their services. By that date, each District would have a Total
Term Life Insurance Sum Assured to GDP ratio of at least 30 per cent. This ratio would
increase every year by 12.5 per cent with the goal that it reaches 80 per cent by January
1, 2020.
Goal: A Total Term Life Sum Assured to GDP Ratio of 30 per cent by January 1, 2016,
increasing by 12.5 per cent every year until it reaches 80 per cent by January 1, 2020, in
every District of the country.
Current status: It is not possible with currently available data to paint a picture of the
depth of insurance penetration in terms of the sum assured measured as a per cent of GDP
for rural and urban areas for each district.
Also, while India fares comparatively well when compared to other countries in terms of
aggregate premiums to GDP, as given in Table 2.2.742, it is not clear, with respect to life
insurance premiums, the extent of term life insurance penetration.
Australia
UK
USA
India
Brazil
Russia
Bangladesh
Table 2.2.7
Insurance premiums as a % of GDP, 2011
Life
Non-Life
3.0%
3.0%
8.7%
3.1%
3.6%
4.5%
3.4%
0.7%
1.7%
1.5%
0.1%
2.3%
0.7%
0.2%
Total
6.0%
11.8%
8.1%
4.1%
3.2%
2.4%
0.9%
Charges for products sold by insurance companies through their distributor channels vary
based on the kind of product. Indicative charges are given in Table 2.2.843.
39
Review of Current Status
Table 2.2.8
Charges for various insurance policies
Annual term life insurance policy
2.5% - 7.5%
Single premium Life Insurance policy
2% of the single premium
General Insurance such as Personal Accident Insurance,
Up to 15% of premium
Property Insurance
Vision 6: Right to Suitability: Each low-income household and small-business would have a
legally protected right to be offered only ―suitable‖ financial services. While the customer
will be required to give ―informed consent‖ she will have the right to seek legal redress if
she feels that due process to establish Suitability was not followed or that there was gross
negligence.
Current Status: The current system of regulations that govern the sale of financial
products and services is based on caveat emptor as a doctrine. Firms do not have the
requirement around Suitability today and therefore none of the envisaged processes are in
place yet.
#
Vision
1
A Universal Electronic
Bank Account
2
Ubiquitous Access to
Payment Services and
Deposit Products at
Reasonable Charges
Table 2.2.9
Summary of Current Status
Goal
Desired
Outcome
Each Indian resident, 100% by January
above the age of 18
1, 2016
Full services access point
within a fifteen minute
walking distance from
every household in India
Reasonable Charges
3
Sufficient Access to
Affordable Formal
Credit
Density of 1 per
sq.km with
population of
400 people,
across the
country by
January 1, 2016
Reasonable
charges
At least one product with
positive real returns
By January 1,
2016
Credit to GDP Ratio in
every District of India to
cross 10%
100% of districts
by January 1,
2016
Credit to GDP Ratio in
every District of India to
cross 50%
100% of districts
by January 1,
2020
Credit to GDP Ratio for
every ―significant‖ sector
of the economy to cross
10%
100% of
―significant‖
sectors by
January 1, 2016
Current
Status
All India 36% with
Urban India 45%; and
Rural India 32%
Density ranges from
89% in Urban areas
and 3% in Rural
areas, calculated at
a district level
Charges range from
0% to 5% for
different classes of
customers
None; the best
available rate is
-1.95%
94% of the Urban
areas and 30% of the
Rural areas,
calculated at a
district level
18% of the Urban
areas and 2% of the
Rural areas,
calculated at a
district level
All sectors
(agriculture, industry
and services) appear
to have crossed this
limit however there
are important subsectors that have
not, such as
Marginal, Small,
40
Review of Current Status
4
5
6
Universal Access to a
Range of Deposit and
Investment Products at
Reasonable Charges
Universal Access to a
Range of Insurance and
Risk Management
Products at Reasonable
Charges
Right to Suitability
Credit to GDP Ratio for
every ―significant‖ sector
of the economy to cross
50%
Convenient Access
100% of
―significant‖
sectors by
January 1, 2020
Density of 1 per
10,000 people,
across the
country, by
January 1, 2016
Affordable Rates
Ordinal by risk
level in the
long-run after
adjusting for
―reasonable‖
transactions
charges
100% of districts
by January 1,
2016
Deposit & Investments to
GDP Ratio in every
District of India to cross
15%
Medium and Large
Farmers and Services
MSMEs.
Only Industry as a
broad sector has
crossed this limit.
99% in Urban areas
and
92% in Rural areas,
calculated at a
district level.
Excluding PACS,
rural access drops to
59%.
Very high levels of
violations of
ordinality within the
formal system and in
the economy as
whole
99% of the Urban
areas and 36% of the
Rural areas,
calculated at a
district level
35% of the Urban
areas and 4% of the
Rural areas,
calculated at a
district level
Charges range from
0% to 11.9% for
different amounts
and for different
products
No Data
Deposit & Investments to
GDP Ratio in every
District of India to cross
65%
100% of districts
by January 1,
2020
Reasonable Charges
Reasonable
charges
Total Term Life Sum
Assured to GDP Ratio in
every District of India to
cross 30%
100% of districts
by January 1,
2016
Total Term Life Sum
Assured to GDP Ratio in
every District of India to
cross 80%
Reasonable Charges
100% of districts
by January 1,
2020
No Data
Reasonable
charges
All financial institutions
to have a Board approved
Suitability Policy.
Presence of district level
redressal offices for all
customers availing any
financial service
100% of financial
institutions by
January 1, 2015
100% of districts
by January 1,
2016
Charges range from
2% to 15% on
different products
This is not required
or present in any
institution today.
There are 15 offices
of the Banking
Ombudsman covering
the entire country
today and none that
cover all financial
services44.
41
Design Principles
Chapter 2.3
Design Principles for Financial Inclusion and Financial Deepening
There are significant changes taking place within the Indian as well as the global financial
system. These include fundamental changes in the needs of consumers, technological
advances particularly in the fields of telecommunications and customer identification, and
in the broad area of financial engineering. Ten years ago, for example, it would have been
impossible to conceive of the possibilities that are emerging from advances in electronic
payments and mobile banking. The danger of developing too specific or prescriptive of an
approach towards comprehensive financial services is that it will become very quickly
outdated and the design will begin to act as an impediment to change instead of being an
enabler. To prevent this and to ensure that the progress towards the achievement of the
vision proceeds in an orderly manner but continually benefits from all that is happening in
the field of finance and other domains that intersect with it, the best way to proceed
would be to ―articulate broad principles that do not vary with financial or technological
innovation‖ but instead have a ―timeless‖ character45. This chapter lays out the design
principles which are expected to have such a character and around which specific
strategies for comprehensive financial inclusion would be designed by various institutions.
Four broad design principles are proposed: Stability, Transparency, Neutrality, and
Responsibility. Each is discussed in detail below:
Principle 1: Systemic Stability: Any design must seek to enhance stability of the financial
system. Following the IMF-FSB-BIS definition, the Financial Sector Legislative Reforms
Commission (FSLRC) defines systemic risk as ―[a] risk of disruption to financial services
that is caused by an impairment of all or parts of the financial system and has the
potential to have serious negative consequences for the real economy.‖ For an emerging
market like India, financial inclusion and depth are no doubt important public policy goals
for reasons discussed in Chapters 2.1 and 2.2. However, extreme care needs to be taken
to ensure that the attempts to accelerate progress on this front do not result in a lowquality financial system with increased instability. Such instability would hurt everyone, in
particular low-income households. Every proposal that seeks to increase financial inclusion
or depth must also be asked whether it will have a consequence of increasing, leaving
unchanged, or reducing systemic risk and instability. This principle, however, must not be
interpreted as a ―do nothing‖ equilibrium because the broader risks of exclusion are also
high. Investments must be made in enhancing regulatory capacity to support advances in
financial inclusion and depth.
This principle also implies that the longer term ―repeated game‖ implications of any
policy or regulatory action must be carefully examined for issues such as creation of moral
hazard. Individual institutions and participants must not have expectations of regulatory
forbearance for certain actions, irrespective of the costs to the financial system.
In the United States, ownership housing for low-income households came to be viewed as
an important policy goal by politicians, regulators and voters alike. This goal was sought to
be realised through the financial system by the creation of Government Sponsored
Enterprises (GSE) such as the Freddie Mac and Fannie Mae46 and other measures, all of
which resulted in the creation of an extremely poor quality portfolio of sub-prime loans on
balance sheets of large banks and mortgage finance companies and transmitted via the
securities markets to balance sheets of insurance companies and other market
participants. This is an illustration of a well-intentioned policy goal that had a highly
detrimental impact on the financial system. On the other hand, in an example from India,
in order to pursue the goal of providing increased access to formal bank accounts and
savings to households, the RBI in 2006 issued guidelines that permitted the creation of
42
Design Principles
Business Correspondents that were expected to make it easier for households to access the
banking system but importantly, the risks of the account would be borne by a regulated
Bank. The systemic risk implications would have been very different if the regulator chose
to achieve the same goal through the creation of lightly regulated deposit-taking entities.
One crucial tool to ensure Stability is capital, in adequate quantum for a given type of
risk. The offering of financial services entails the assumption of three broad types of risks:
(a) market (including liquidity) risk; (b) credit risk; and (c) operational (including
settlement, legal and reputational) risk. Each entity that aspires to participate in this
process, no matter how large or small its role, needs to clearly identify the specific risks
to which it is exposed and to have an adequate amount of capital to absorb that risk.
While it is generally accepted47 that institutions that are permitted to warehouse
insurance risks or hold deposits on their balance sheets, need to have a level of capital
that reflects their underlying risk profile, it is often assumed that agents of financial
institutions do not need to hold any capital at all. However, unless a financial institution is
willing to accept complete financial responsibility for all aspects of the agents‘ behaviour
and unconditionally surrender its right to repudiation and allow the agent to function
under the Doctrine of Indoor Management48, given the incomplete nature of the contract
between the agent and the financial institution, each agent must have an adequate
amount of financial capacity to absorb all the risks that are attendant with his role49.
The Committee is also of the view that for Stability to obtain, providers must be
financially sustainable. In the absence of this, their ability to generate capital is severely
constrained and it is not clear if all the risks borne by them are being priced correctly.
Under-pricing of risks can lead to build-up of asset bubbles.
Principle 2: Balance-sheet Transparency: Any design must require each participant in the
system to build a completely transparent balance sheet in such a way that it reflects an
accurate picture of its current status as well as the impact on this status of stress
situations that the participant may encounter. For any financial institution the most
important risks are embedded in its balance sheet and while in a ―true but unobserved‖
manner, they evolve continuously; it can take an extended period of time, sometimes
several years, before the risks become directly apparent. For a financial system to
function well the true quality of the balance sheet must be made visible in a highfrequency manner and efforts must be constantly made to ensure that an accurate
estimate is made of the true value of the each component of the balance sheet. This
ensures that risks do not build-up in the system undetected and subsequently resolve with
a catastrophic impact on the system; participants make every effort to manage these
risks; and eventually the stronger participants grow and thrive while the weaker ones
gradually fade away.
Once again here, this is not fundamentally at odds with a policy of financial inclusion and
deepening. For example, if there is a policy goal of ensuring adequate financing to
farmers, this does not by any means imply that the quality of such finance and its impact
on the balance sheet of the lender must be opaque. Transparency in the quality of these
assets provides important feedback loops for policy formulation and refinement as well as
product design. In this example, in an extreme scenario, a case might emerge that the
quality of assets is so poor and the resultant systemic risks significant enough that the
policy goal is better achieved through direct cash transfers to the target farmers rather
than intermediated through bank balance sheets.
Principle 3: Institutional Neutrality: Any design must ensure that the treatment of each
participant in the financial system is strictly neutral and entirely determined by the role it
is expected to perform and not its specific institutional character. In other words, function
43
Design Principles
over form50. Additionally, the financial system design must not be predicated on the
existence of a subsidy from some parts of the financial firm‘s balance sheet to support
other parts. While it may well be that individual firms strategically decide to crosssubsidise products or business lines, the design of the financial system should in no way
force such a subsidy.
India has a wide range of entities that participate in the financial system. Amongst formal
institutions there are several that are directly owned by the government, several that are
entirely owned by the private sector, and others that have a cooperative character. For a
variety of historical reasons regulatory structures have been designed separately for each
type of institution to the point where there is a concern that the focus has moved from
serving the end customer to preserving a certain institutional design. Variations in
regulatory treatment have the potential effect of protecting weaker institutions and do
not therefore allow the evolution of a robust market structure which encourages the
stronger institutions and products to grow and the weaker ones to gradually fade away.
The report of the Rajan Committee (2009) stated that:
In an efficient financial system, the playing field is level so that different institutions
compete to provide a function, no institution dominates others because of the
privileges it enjoys, competition results in resources being allocated efficiently, and
society gets the maximum out of its productive resources. This is also equitable for
only thus will the interests of consuming masses be emphasized, instead of the more
usual trend of privileged producers being protected.
Another form of Neutrality is internal to the Financial Institution. The financial systems
design should not be predicated on parts of the balance sheet of a financial institution
subsidising another portion. It is often argued that the fact that since commercial banks
have privileged access to low-cost deposits in return they must pay a compensatory
penalty and lend to certain sectors of the economy at negative rates of return51. This
argument has a number of flaws. First, it treats savings as somehow being ―inferior‖ or
―less important‖ than loans – it is not at all obvious that at the level of a household this is
indeed the case; and second, offering lower rates of interest to depositors results in a
diversion of savings away from financial assets which on economy-wide basis reduces the
supply of funds available for loans. And, in a market where the charter value of a bank is
gradually eroding and new payment institutions are emerging, it is not clear how much
longer the interest benefit from low-cost deposits will survive but any high cost
infrastructure that is created in pursuit of such priority sector obligations could end up
acting as a high ―tax‖ for the financial institution and the financial system as a whole.
This does not imply, however, that as a matter of its strategy, a financial institution
cannot cross-subsidise products and activities or that a business group cannot crosssubsidise across its financial and non-financial service product lines. There may be
competitive reasons to do so.
Principle 4: Responsibility towards the Customer: Any financial systems design must make
it unnecessary for the household or the small business to build a full understanding of risks
and Suitability as a pre-requisite for availing services but instead maintain the principle
that the provider is responsible for sale of suitable financial services. This must be viewed
in the context of persistent information asymmetries that are inherent in financial
services. When a household or a small business buys services such as rainfall insurance or
derivatives that it needs from a risk management perspective, it does so with very little
ability to understand the precise nature of the risk it has taken on. That does not,
however, mean that these services are not welfare-enhancing.
44
Design Principles
Maximising the well-being of low-income households and small businesses requires the
financial system to find a way to deliver to the customer all of the products that it is able
to offer which may themselves have very complex designs but together serve to simplify
the life of the customer and allow her to minimise the risks that she faces and maximise
the benefit to her from the available growth opportunities. It also requires the financial
system to ensure that all the participants directly facing the customer make every effort
to offer only such welfare-enhancing products to the customer and are prevented from
offering those that do not have this property.
In summary, the four design principles for financial inclusion and deepening are:
1.
2.
3.
4.
Stability
Transparency
Neutrality
Responsibility
45
Banking Systems Designs
Chapter 2.4
Banking Systems Designs
This chapter aims to provide a framework to understand various types of current and
potential banking system designs. While there are many ways to specify this, the
functional building blocks of payments, deposits and credit are used to construct two
broad designs. These are the Horizontally Differentiated Banking System (HDBS) and the
Vertically Differentiated Banking System (VDBS). Within each of these designs, there are
multiple institutional categories that are explored.
In a HDBS design, the basic design element remains a full-service bank that combines all
three building blocks of payments, deposits, and credit but is differentiated primarily on
the dimension of size or geography or sectoral focus. This could also be referred to as an
Institutional Design Configuration. In a VDBS design, the full-service bank is replaced by
banks that specialise in one or more of the building blocks of payments, deposits, and
credit. This could also be referred to as Functional Design Configuration. In reality, most
banking systems will have a mix of both designs.
Horizontally Differentiated Banking System: The various configurations within HDBS are
shown in the table below. In this design while all configurations are deposit-taking, the
variations between them are on account of: (i) the ways in which they originate risks and
transmit them throughout the system; and (ii) their size and focus - whether regional or
sectoral. Each of the column types are defined below:
S.No:
1
2
3
4
5
6
Table 2.4.1
Horizontally Differentiated Banking System
DESIGN
REGIONAL /
CAPITAL
SECTORAL
MARKETS
FOCUS
NATIONAL BANK WITH BRANCHES
NO
NO
NATIONAL BANK WITH AGENTS
NO
NO
REGIONAL BANK
YES
NO
NATIONAL-CONSUMER BANK
YES
NO
NATIONAL-WHOLESALE BANK
NO
YES
NATIONAL-INFRASTRUCTURE BANK
YES
YES
AGENTS
NO
YES
NO
YES
NO
NO
1. Regional Focus: This refers to their geographical focus which can either be national or
regional.
2. Sectoral Focus: This could either be consumer or corporate banking or project finance.
3. Capital Markets: This refers to whether or not there is an interaction with capital
markets from the point when an asset is originated to when it is warehoused.
4. Agents: This refers to whether or not the design requires the use of agents who are not
direct employees, to reach the customer. These agents are principally characterised
by their lowered transactions costs and the fact that they do not bring any risk bearing
capacity at all in the form of capital especially with respect to lending.
This approach in theory produces sixteen potential designs but only the six mentioned in
the table above are sufficiently distinct to represent fundamental design choices – the
other ten are variations / hybrids of these basic six designs. Each of these six designs is
discussed in some detail in the following paragraphs by invoking the previously stated
design principles of Stability, Transparency, Neutrality, and Responsibility.
46
Banking Systems Designs
1. National Bank with Branches: This is a design in which the bank operates on a
nationwide basis exclusively through owned branch networks and if it does use agents,
it does so only very sparingly for transactions processing and not for origination. Within
India, State Bank of India embodies this model on a national basis but several other
supra-regional government owned banks such as Punjab National Bank and Bank of
Baroda also represent this model. In aggregate, there are 105,753 branches across all
scheduled commercial banks in India52.
This structure has several advantages in terms of: diversification across several regions
as well as asset classes, lower cost of capital, and consistency of culture and operating
environment and within India has done reasonably well in performing its role in an
urban context. However, given its exclusive reliance on branches, it has been very
challenging to create a network that is adequate to serve the entire Indian population
living in over 25 lakh habitations53. There is also evidence that forcing National Banks
to extend reach in terms of branch networks is producing both high cost structures as
well as non-performing assets54. The very consistency of culture and operating
environment makes it very difficult for such banks to adapt to local needs as well as
effectively use ―soft‖, locally available information about small businesses and lowincome households. It produces a tendency towards uniformity of processes and
decision making structures as well as high costs that are not well suited to serve the
wide variety of local customers that it encounters with each one representing higher
levels of risk but relatively modest levels of revenue.
This design also tends to be opaque as there is no capital markets interaction
anywhere in the sequence from origination to warehousing of assets and therefore,
very few market signals other than equity price of the entire bank. A financial system
that has only a few large National Banks, while easier to supervise centrally, also
creates a stability concern stemming from the fact that the probability of failure of an
individual Bank translating into a systemic event is high55.
2. National Bank with Agents: This is a design in which there are large banks which may
or may not have a large branch network despite their large balance sheet size and net
worth. Private Banks such as ICICI Bank, Axis Bank, and HDFC Bank are good examples
of such banks within the Indian context. In this design there is no use of Capital
Markets but there is extensive use of Agents of various types. This design directly
extends the reach of these banks through the use of individual or corporate agents who
act as ―pure agents‖ without any capital commitment whose operational cost
structures are significantly lower than that of a bank branch.
In the context of financial inclusion, one specific type of Agent that has gained
importance in recent years is the Business Correspondent (BC) of which there are over
2.2 lakh now. These are Agents that transact on behalf of the Bank, typically for
deposits and payments. Brazil has had the most success with this approach through its
Business Correspondent model but a review of the progress there finds that while these
correspondents have effectively acted as good transactions points (payments,
withdrawals, and deposits account for over 95 per cent of the transactions volume),
opening of new bank accounts and provisions of loan accounts formed only 0.35 per
cent of the transactions volume because the capital free nature of these agents does
not provide the comfort with loan origination that Banks need. This picture is also true
for Indian Banks that have deployed BCs. While the programme is still in its early
stages and has the potential for deeper presence than the traditional bank branch, it
needs to overcome several teething problems before it reaches full viability as a
payments channel but it is not very clear if in its current form, as a dedicated channel,
it will ever do so56.
47
Banking Systems Designs
The available evidence suggests that while the National Bank with Agents design could
eventually have some success at delivering payment services through its BCs,
particularly in high revenue areas, there would be some significant credit risk if they
were permitted to accumulate assets originated through BCs that do not bring any
capital of their own with regard to the underwriting they carry out.
3. Regional Bank: This is a design in which there are several Regional Banks, each
relatively small in size, that are full-service Banks (offering credit, deposits, and
payments services). This design is also sometimes referred to as ―Small Banks‖ or
―Community Banks‖. These are supervised directly by the national regulator and
governed on a day-to-day basis by their local boards. While these banks may borrow
some amounts in wholesale markets their principal source of funds is their local
deposit base. A Regional Bank does not use Capital Markets for its resource raising nor
does it use Agents in any form to reach its customers – its only means of serving
customers is typically through its branches.
The country where this model of banking has historically thrived is the United States.
It has 8,100 commercial banks, 1,200 Savings and Loans Associations, and 12,000 credit
unions (cooperative banks). Its top ten banks have only 60 per cent of total assets
compared to Canada or UK where 4 or 5 banks dominate the industry and have close to
90 per cent of the assets57. Even in the USA though, despite its resilience, the model is
in retreat58 because National Banks and Non-Bank Financial Institutions have been able
to bring both a wider range of products as well as lower cost of funds into the home
markets of the Regional Banks. Developing countries that mandated community banks
with low minimum capital requirements produced hundreds of institutions that have
had solvency problems while not solving the inclusion problem (Nigeria, Tanzania) or
have required intensive, subsidised upgrading programs (Philippines, Ghana). The jury
is still out on Mexico, but risks are apparent. Supervisory capacity has been
overwhelmed by many small institutions, leaving weaknesses uncorrected59.
Regional Banks are likely to be able to process ―soft‖ information for lending better
than National Banks. However, their local nature also makes them more prone to
―capture‖. This could lead to persistent governance problems and owing to the higher
exposure that they have to local systematic risk (weather, crop prices, and regional
economic performance), they are likely to have to pay a higher rate to their depositors
which in turn, might create the need to make ―riskier‖ loans resulting in a vicious
cycle of rising non-performing assets. The Regional Rural Bank which was conceived of
as a subsidiary of larger National Banks was potentially a stronger design because it
successfully dealt with the challenge of ―capture‖ by local political interests owing to
its relationship with its parent, but eventually did not perform as expected because
gradually the culture and the cost structure of the parent National Bank permeated
into the Regional Rural Bank as well and overwhelmed the attempts at building a truly
regionally focussed institution. A design that seeks to significantly grow this category
of institutions will place significantly higher regulatory and supervision demands. It is
not clear that India is equipped for this. At the same time, there may be ways to
leverage the existing network of these institutions in ways that don‘t create
instability. All of these issues are discussed in greater detail in later chapters.
4. National-Consumer Bank: This is a type of National Bank design that focusses on
consumer credit using sophisticated techniques such as credit scoring to deal with
adverse selection and relying on collateral enforcement and credit reporting to
address concerns relating to moral hazard. Some of the international banks in India
have successfully used this strategy while building out their consumer finance and
credit card businesses as have the domestic mortgage lenders. Sometimes this
approach has been extended to small business lending as well. The credit risk often
48
Banking Systems Designs
remains high but is sought to be dealt with by charging very high interest rates.
Developed financial systems infrastructure such as credit bureaus, and specialised
collection agencies make the task of such lenders easier. However the experience of
the US sub-prime crisis warns of the dangers of exclusively relying on credit-scoring
approaches to origination60 particularly in the ―sub-prime‖ segment where the opacity
of information is much higher. However, as ―hard information‖ becomes more readily
available, this route does represent an opportunity to extend credit on a nation-wide
basis61, particularly for niche areas such as student loans. The Deposit taking NBFCs in
India, including the Housing Finance Companies that take deposits from the public,
may also be thought of as belonging functionally in this category.
5. National-Wholesale Bank: This is another type of the National Bank design which is not
focussed on any particular region or sector. The asset creation activity of this bank is
almost entirely in the form of wholesale loans to the corporate sector and purchases of
high quality, rated, securitised and other assets from the capital market62, which
include a substantial amounts of retail and small-business loans as well. They have no
Agent networks but have a fairly high degree of interaction with capital markets as
they constantly seek to optimise returns and portfolio quality. These institutions would
be very large and would need to maintain very strong credit ratings and capital
adequacy positions. These Banks could also emerge as strong investment banks as they
seek to maximise returns on the high levels of capital required to maintain their
ratings.
6. National-Infrastructure Bank: This is a variation of the Wholesale Bank wherein the
institution focuses on one particular sub-segment of the wholesale market. It is not
obvious that such an institution would need to be a full-service bank with deposit
taking functions. It will need to diversify its balance sheet profile and actively manage
it to ensure that it does not end up with high levels of concentration risks to particular
sectors. The erstwhile DFIs were structured in this manner but because they failed to
actively manage concentration risk they eventually failed. A current high-performing
example is IDFC, which specialises in financing infrastructure projects without
accessing public deposits.
Vertically Differentiated Banking Systems: This approach to design revisits the notion of a
full-service bank itself and constructs different types of ―banks‖ using the three building
blocks of payments, deposits, and credit. Within India as well as around the world it is
possible to find different examples of such specialised institutions such as the South
Korean Post Office Bank (only payments and deposits), GE Capital (credit and payments),
MasterCard and Visa (only Payments), India Post (deposits and payments), Mahindra
Finance (credit and term deposits). The rationale for their existence is usually linked to
niche capabilities such as credit under-writing for specialised business segments or
network management in the case of payments. In this section, this approach to design is
explored more fully, all the possibilities examined, and their merits and demerits
discussed in some detail.
This approach produces five potential designs that are specified below:
49
Banking Systems Designs
S.No:
1
2
3
4
5
Table 2.4.2
Vertically Differentiated Banking Systems
DESIGN
CREDIT
RETAIL
DEPOSIT
PAYMENTS NETWORK OPERATOR
NO
NO
PAYMENTS BANK
NO
YES
FULL-SERVICE BANK
YES
YES
WHOLESALE CONSUMER BANK
YES
NO
WHOLESALE INVESTMENT BANK
YES
NO
PAYMENTS
YES
YES
YES
YES
YES
Each of these five designs is discussed in the following paragraphs.
1. Payments Network Operator: This is a dedicated payments company which does not
accept deposits or issue electronic money (e-money) but merely routes payments from
one point to another in an instantaneous manner, without holding any balances. In
India, examples of this design include VISA, MasterCard, National Payments
Corporation of India, and Corporate Business Correspondents such as FINO and White
Label ATM providers such as Prizm63.
A Payments Network Operator can be nested or independent. A Nested Payments
Network Operator would need to partner with a bank (Sponsor Bank) to clear payments
and the Sponsor Bank will participate in the payments network – the payments system
would not directly deal with the Payments Network Operator. An Independent
Payments Network Operator would directly participate in the payments system just
like any other bank. This would include bank card network companies like VISA and
MasterCard and also retailers that issue their own cards, such as Walmart. Currently
India allows only Nested Payment Network Operators to operate but globally this is not
always the case and if the size of the Payment Network Operator becomes large
relative to its Sponsor Bank it could potentially create undesirable levels of contagion
risks.
2. Payments Bank: This is a design that provides payment and deposits, but not credit. A
Payments Bank may or may not pay interest on the account/wallet that it
provides. Once again, a Payments Bank can be nested or independent. A Nested
Payments Bank would need to partner with a bank (Sponsor Bank) to hold both the
escrow account and to participate in the payments network. An Independent Payments
Bank would be a direct participant in the payments system and instead of escrow
balances with the sponsor bank would hold some combination of CRR and SLR directly
with the Central Bank. Globally, in the inclusion context, Kenya‘s M-Pesa is the most
successful example of a Nested Payments Bank. Over two thirds of Kenya‘s population
now uses this service and about 25 per cent of the Kenyan GDP flows through it64. A
number of other products have started to be offered through the M-Pesa payments
platform, including Bank deposits, loans and pre-paid electricity vouchers.
In India, Pre-Paid Instrument Issuers (PPIs) like Airtel Money and Oxigen are effectively
Nested Payments Banks. They acquire the customer, issue a pre-paid wallet and
facilitate transfer of value within their network (closed or semi-closed loops) or to a
bank account outside their network (open loop). All balances in the wallets are held in
escrow with a Bank and no interest is paid on such balances to the customer currently.
There is, however, a concern that nested designs in any form, including Nested
Payments Banks create opacity. The Payments Bank has to take a view on the riskiness
of its Sponsor Bank that holds its deposit balances and the Sponsor Bank has to worry
about the operating quality and the likelihood of a ―run‖ on its partner Payments
50
Banking Systems Designs
Bank. While today PPIs are not required to maintain capital, it would be important to
evolve capital rules for operational risks and credit risk (of the Sponsor Bank) in the
case of Nested Payments Banks and for operational and market risks in the case of the
independent Payments Bank.
3. Full Service Bank: This is the traditional model of full-service banks whose variants are
listed in Table 2.4.1.
4. Wholesale Investment Bank: This design is very similar to the Full Service Bank in the
manner in which it operates on the asset side, but on the liabilities side it does not
accept retail deposits (deposits less than Rs. 5 crore). The Wholesale Investment Bank
does not make retail loans either, it only lends in niche wholesale markets such as
infrastructure or corporates.
5. Wholesale Consumer Bank: Like the Wholesale Investment Bank, the Wholesale
Consumer Bank also does not accept retail deposits. The Consumer Bank operates in
retail lending, but could do this without necessarily building a large branch network,
relying instead on sophisticated credit scoring methodologies.
Design Choices:
It would appear that a well-functioning financial system has a good mix of institutions that
collectively meet the needs of the country while enhancing the stability of the system as a
whole. Fortunately, in India, there are already many of the elements referred to
previously and experience with multiple kinds of banking system designs. For example,
India has significant experience of both the National Bank as well as the Regional Bank
design. There are a robust set of NBFCs; and several PPIs are currently active. What is
required is to evaluate these experiences systematically and accelerate the growth of the
designs that seem to hold promise for financial inclusion and that are consistent with the
design principles. Additionally, there is a need to enable significant partnerships between
various institution types that leverage each of their strengths.
It has been argued that there are sound efficiency reasons for lending and deposit-taking
to be combined in the same institution65. However, these efficiency arguments can be
dominated by effectiveness and risk management arguments if the same full-service banks
turn out to be unsuited to the task for either building effective outreach or managing the
associated credit risks. Additionally concerns regarding self-dealing are far more
pronounced in the case of deposit taking institutions which are also authorised to lend,
and may also end-up dominating the efficiency argument, particularly amongst financial
institutions that have poor regulatory and market oversight. Within regional or sectorally
focussed institutions, given the higher levels of risk implied by their lending portfolio and
the inability of the local depositor to effectively diversify or even monitor the risk of the
institution adequately, the depositor is likely to demand a risk premium which would
increase the cost of funds of the financial institution by an amount greater than the
efficiency gains implied by the sharing of the ―liquid asset stockpile‖. In the Indian
context all of these concerns are visible and it would be important to have the regulatory
flexibility to approach payments, savings, and credit independently (the Vertically
Differentiated Banking Design) and to bring them together (the Horizontally Differentiated
Banking Design) when the efficiency gains are high and the other costs are low. This is
discussed in greater detail in subsequent chapters.
51
Section 3
Building a Ubiquitous Electronic Payments Network and Universal Access to Savings
Payments and Savings: Introduction and Strategic Direction
Chapter 3.1
Introduction and Strategic Direction
Introduction:
The vision statements for payments and savings for small businesses and low-income
household are:
By January 1, 2016 each Indian resident, above the age of 18 years, would have an
individual, full-service , safe , and secure electronic bank account.
By January 1, 2016, the number and distribution of electronic payment access points would
be such that every single resident would be within a fifteen minute walking distance from
such a point anywhere in the country. Each such point would allow residents to deposit and
withdraw cash to and from their bank accounts and transfer balances from one bank
account to another, in a secure environment, for both very small and very large amounts,
and pay ―reasonable‖ charges for all of these services. At least one of the deposit products
accessible to every resident through the payment access points would offer a positive real
rate of return over the consumer price index.
India has a rich and diverse payments infrastructure in place already. A number of
measures have been taken by RBI to ―activate‖ this infrastructure66 including the creation
of:
1. The National Electronic Clearing Service (NECS) to ―facilitate centralised processing for
repetitive and bulk payment instructions‖67.
2. The National Electronic Funds Transfer (NEFT) payment system to facilitate (in a
batch-mode with netting), ―one-to-one funds transfer‖ from an account in ―any bank
branch‖ to an account in ―any other bank branch in the country‖68.
3. The Real Time Gross Settlement (RTGS) System which is similar to NEFT but operates
in real-time on a transaction to transaction basis and is ―primarily meant for large
value transactions‖69.
4. The Immediate Mobile Payment Service (IMPS), ―an instant interbank channel agnostic
electronic fund transfer service which includes mobile phones‖70 between customers of
different banks.
5. White Label ATMs (WL-ATMs) by ―non-bank entities‖ recognising that, ―investments in
ATMs have been leveraged for delivery of a wide variety to customers‖ and ―expanded
the scope of banking to anytime, anywhere banking through interoperable
platforms‖71. Although there has been nearly 23-25 per cent year-on-year growth in
the number of ATMs (1,26,950 as of 30th August 201372), their deployment has been
predominantly in Tier I & II centres. There is a need to expand the reach of ATMs in
Tier III to VI centres (classification of centres as prescribed under the Census of India
2011). In spite of the banks' pioneering efforts in this direction, much needs to be
done.
6. A Payments system for the issuance and operations of Pre-paid Instruments that are
issued by banks and non-banks on an ―Open System‖ and a ―Semi-Closed System‖ basis
respectively.73
7. A Mobile Banking system permitting banks to offer services to their customer over
mobile phones74.
55
Payments and Savings: Introduction and Strategic Direction
8. A network of Business Correspondents across the length and breadth of the country by
permitted Banks to engage individuals, and for-profit and non-profit organisations as
their agents for the performance of some of the core banking functions75.
However, despite all this effort and the number of initiatives that have been taken, as can
be seen from the data and discussion in Chapter 2.2, there is still a vast gap in the
availability of even basic payments and savings services for small businesses and lowincome households both in rural and urban India. However, the large presence of Business
Correspondents, advances in mobile telephony, rural and urban broad-band connectivity,
and the large scale roll-out of Unique-ID (Aadhaar) numbers (more than 50 crore
generated by the end of November 2013 with more than 3 crore generated in November
alone)76 now offer an unprecedented opportunity to realise this vision and for India to
leap-frog over several other far more developed countries in this area just as it has done
in mobile telephony.
Strategic Direction:
As evidenced by the July 2002 date of its ―Report of the Working Group on Electronic
Money‖ India was one of the early movers amongst both developed and developing
countries in formally exploring the potential of electronic money77. However, driven by
concerns relating to the loss of seigniorage income of the Reserve Bank of India (―…lesser
private sector demand for central bank money and the consequent threat to the existence
of the central bank‖78), and the lower perceived ―credibility of non-bank financial
institutions in India‖79, the Working Group recommended a model which restricted the full
use electronic money only to scheduled commercial banks with very limited participation
being permitted to non-banks80. In the last ten years since the report was published, this
appears to have been the guiding regulatory philosophy in India, even if not entirely for
just these two reasons.
Given the sheer size of the country (33 lakh sq. km., 120 crore population) and the
absolute poverty of a majority of its citizens (more than 60 per cent with an income below
USD 2 per day)81, a large proportion of them do not have the financial capacity to absorb
the costs associated with the management of physical currency notes and traditional
branches. This implies that while some progress can indeed be made using a crosssubsidisation route or the use of more efficient non-branch but cash-based channels such
as ATMs and Business Correspondents, the financial inclusion and efficiency gains
associated with the wide-spread, even ubiquitous use of electronic money are likely to be
very high. For these reasons making access to formal electronic payments infrastructure
universal is a key component of the overall vision of financial inclusion and the RBI vision
document on payments82 correctly aims towards an economy that is eventually entirely
cash-less. In this document, RBI lays out the over-arching vision to ―proactively encourage
electronic payment systems for ushering in a less-cash society in India‖. In addition to the
obvious benefits to individuals and businesses, moving away from cash-based transactions
to electronic transactions also has important efficiency benefits for the Government83. A
2010 McKinsey study84 while assessing the costs and benefits of digitising government
payments in India estimates that the Government would save more than Rs.1 lakh crore
per annum if it were to digitise all payments to and from the government.
In order for this state of the future to be realised, while clearly bank-led strategies will
have a key role to play, it will become necessary to:
1. Address the concerns relating to the loss of seigniorage income by either concluding
that it is not a serious problem or by finding alternate solutions for it.
2. Add to the work being done by the bank-led channels and develop new ways of
harnessing the capabilities of non-bank institutions as independent participants in this
56
Payments and Savings: Introduction and Strategic Direction
strategy while ensuring that concerns of Stability, Transparency, Neutrality, and
Responsibility are not violated in the process and in particular a level-playing field is
ensured for the existing scheduled commercial banks.
It is estimated that in order to achieve the vision, more than 30 lakh payment points will
be required. The number of 30 lakh points itself is not daunting given the number of
transaction points that already exist in urban India. What is required is a greater
proliferation in rural India so that there is a more even distribution of points which have
the ability to handle very small value transactions efficiently and in a secure manner.
While, through the dedicated Business Correspondent model, banks have indeed been able
to provide this functionality quite effectively in more densely populated urban areas, it is
in the very low-revenue rural areas that they have faced a particular challenge and is
perhaps the place where independent non-bank players such as telecommunications
companies which have far bigger customer bases and a significantly deeper presence, may
be able to add the most incremental value for the following reasons:
1. Banks are the most effective and efficient when credit and savings products are
offered together. However, while ubiquity and the presence of 30 lakh access points is
a desirable vision for payments and savings services, credit by its very nature is a
significantly more specialised activity with important customer protection, and risk
considerations for the financial system requiring the presence of better trained and
higher cost personnel whom the customer needs to access relatively less frequently.
Far fewer such points would be needed or for that matter would be supportable from a
feasibility and viability point of view. And, while they would be more than adequate in
number for the provision of credit, they may not be able to meet the requirements of
a ubiquitous payments system.
2. While provision of credit is an important ―adjacency‖ that is available when payment
and savings services are integrated with it, there are a number of other businesses
with adjacencies to payments which have even higher risk-adjusted margins than
credit does, such as retailing and mobile telephony that, under the appropriate
regulatory architecture, can increase the penetration of very low cost payment points,
particularly in rural and low-income urban neighbourhoods where the revenue flows
from purely ―bank-like‖ businesses are not sufficient to ensure channel viability.
3. This approach also brings these non-banks firmly into the fold of financial services and
facilitates system wide access to the very valuable data that they hold on their
customers which otherwise would be accessible only with great difficulty. There would
of course in any case be a need to put in place some carefully designed
complementary infrastructure in partnership with these institutions that would
facilitate such access. This issue is discussed in great detail in the chapter on
Complementary Infrastructure later in the report.
4. When banks seek to partner with such businesses even for purely payments purposes, a
problem of ―pancaking‖ also occurs where both the bank and the front-end ―Business
Correspondent‖ partner such as a telecommunications company need to maintain
account information for the client. Client revenues now have to support the cost of
two accounts when they are barely sufficient to support one.
The above discussion does not, by any means, intend to conclude that the existing banks,
if they so wished, using a variety of partnerships would not be able to offer payment and
savings services to small businesses and low-income households, but it does suggest that
the inclusion of additional participants could significantly accelerate progress towards
universal access as long as it is done in a way that does not disadvantage existing banks.
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Payments and Savings: Introduction and Strategic Direction
The experience of both developed and developing countries has been consistent with this
view.
In addition to exploring the potential of new channels, given the sheer size of the country
and its unbanked population, there are also some critical enablers that will need to be in
place to enhance the potential for impact of all the channels and to achieve faster and
more orderly progress towards the goal of universal access to payments and savings
services. The solutions to each of these problems will necessarily need to be very different
from those taken by other smaller developing countries or the developed countries which
have followed a more traditional pathway. These are related to the existence of a
universal bank account, resolution of Know-Your-Customer (KYC) issues, suitable
authentication strategies, and existence of smooth inter-operability across channels. The
rest of this chapter will discuss each of these issues.
Universal Electronic Bank Account (UEBA)
There is considerable value in the existence of an electronic bank account that is
automatically assigned to every citizen at the point that she gets an acceptable identity
number such as Aadhaar. Opening bank accounts in field settings for individuals is both
difficult and expensive. However, not having an account becomes a barrier even for the
government to operationalise its various DBT schemes to low-income households.
Additionally, the bank account has become an essential gateway to all financial services,
including those supervised by other regulators. Not having one is equivalent to being shut
out of the entire financial system.
One of the vision statements is that by January 1, 2016 each Indian resident, above the
age of eighteen years, would have an individual, full-service, safe, and secure electronic
bank account. The automatic bank account has to be provided by a high-quality, national,
full-service bank. It is recommended that the following approach that leverages the
Aadhaar number issuance process be pursued:
1. An instruction to open the bank account should be initiated by UIDAI upon the issuance
of an Aadhaar number to an individual over the age of 18. The bank would need to be
designated by the customer from amongst the list of banks that have indicated to
UIDAI that they would be willing to open such an account with the understanding that
it would attract no account opening fee but that the bank would be free to charge for
all transactions, including balance enquiry with the understanding that such
transactions‘ charges would provide the host banks with adequate compensation. In its
discussions with members of the Committee, State Bank of India, Bank of Baroda and
Axis Bank have indicated their willingness to participate. The Committee recommends
that RBI issue a circular that permits banks to open such an account upon the receipt
of such an electronic instruction. The Committee also requests all the other banks that
have an interest in this to formally write to UIDAI.
2. UIDAI has already indicated that there are over 24 crore individuals that have an
Aadhaar number and wish to have a bank account. UIDAI has agreed that it would
facilitate an automatic opening of these accounts with banks that show an interest.
The Committee also recommends that the RBI issue a circular indicating that no bank
can refuse to open an account for a customer who has adequate KYC which specifically
includes Aadhaar (as this data sent by UIDAI is same as e-KYC already recognised by
RBI). The UIDAI would therefore be able to automatically send a request for those
individuals who have not designated a specific bank but have indicated an interest in
having a bank account opened to a bank which has a branch closest to the customer.
Such a bank would be required to open this account under extant RBI regulations and
send a letter to the customer indicating the details of this account.
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Payments and Savings: Introduction and Strategic Direction
3. The resident is of course free to open an additional account with any financial
institution and map their Aadhaar number to it but the UEBA would remain active as a
perpetual account as long as the Aadhaar number remains active. In order to ensure
that the account does not get misused without the knowledge of the account-holder,
the account could remain inactive until, by using it at least once in a properly
authenticated manner she indicates her acceptance of the account, and its terms of
use.
If a UEBA is not possible to be issued automatically there is a real risk that banks may
directly or indirectly refuse to open bank accounts for under-banked customers which are
full service or, as has been seen recently in the context of Basic Savings Bank Deposit
accounts85, if they indeed open them, refuse to make full service functionality operational
on account of the costs involved. To address this issue, in Sweden, for example, banks
cannot refuse to open a saving or deposit account under Section 2 of the Banking Business
Act of 1987 while in France, Article 58 of the Banking Act, 1984 recognises the principle of
the right to a bank account86. A similar guideline would need to be issued to banks in India
and aggrieved individuals would need to have the right to seek redress from RBI in case
they have not received this account. Upon receiving such a complaint the RBI would need
to ensure that such an account is opened within 30 days of receipt of the complaint.
An important issue behind the reluctance of banks has been the requirement to bundle a
number of free transactions along with a basic bank account87. This represents a real cost
to the bank88 and it is not clear that it represents an equivalent source of value to the
customer or if indeed what is offered for free is the best route for the customer to access
these services. In order to ensure that each customer is offered a UEBA in a manner that
does not become a substantial drain on the banking system and that multiple channels
evolve to serve the customer, it would be important for policy to move away from the
notion of forced bundling (which is equivalent to hidden subsidies) to a strategy in which
the customer needs to pay for every transaction but has a choice of competitive channels
through which she can access her account at an affordable cost.
RBI and UEBA
Concerns have been raised around the digitisation of cash and its effect on monetary
policy and in particular seigniorage revenue of the RBI89. Given the fact that at Rs.12
lakhcrore of notes in circulation90 this amounts to over 50 per cent of the RBI‘s balance
sheet and at an average T-Bill rate of about 7 per cent represents an interest savings of
about Rs.84,000 crore (about 1 per cent of Indian GDP) to the RBI (more than 100 per cent
of its Gross Income during the same period), this is an important concern. From a public
policy perspective seigniorage represents an effective tax on the financial assets of
households and firms that are being held using currency notes. This is a global
phenomenon and applicable in every country of the world and is a key component of the
revenues of the Central Bank and the national exchequer. However, in India (and other
developing countries) since the poor are likely to hold a larger proportion of their financial
assets in such a form and, given poor progress on financial inclusion, are the least likely to
substitute away from it, this tax, levied in its current form, acquires a highly regressive
character.
Reports of the BIS Committee on Payment and Settlement Systems suggest that while, ―so
far no Central Bank has indicated an adverse impact on the size of its balance sheet due to
a decline in the value of the banknotes in circulation as a consequence of widespread
adoption of e-money. The ECB is of the view that the national Central Banks can maintain
the size of their balance sheet if necessary by imposing minimum reserves on e-money
issuers or by issuing e-money themselves‖91. In India the switch to electronic money is
already on its way but is likely to happen much more slowly but result in the steady
59
Payments and Savings: Introduction and Strategic Direction
reduction in the seigniorage income of the RBI and impair its ability to finance its assets
such as the foreign exchange reserves of the country.
All of this builds a case for the RBI or an Agent appointed by it to become the sole issuer
of e-money and to invest in its rapid adoption as a medium of exchange with the goal of
rapid phase-out of currency notes in circulation on a nation-wide basis. If indeed the RBI is
able to become the sole issuer of e-money it could issue it directly to the other purveyors
of e-money (as it does with notes in circulation now) and thus maintain only wholesale
accounts on its books.
KYC Issues
Current KYC guidelines from the RBI are very different from those of other regulators and
require that in addition to a proof of identity the individual provide documented proof of
her current address. Proof of identity can be obtained by the individual from local
authorities at the place at which they were born but proof of local address is much harder
to obtain and is perhaps now the most significant barrier to opening a bank account for
many individuals in urban and rural environments.
This requirement appears to be unique to the RBI and is neither required by the global
Financial Action Task Force (FATF) nor even by other equally conservative financial
regulators. FATF Guidance on Financial Inclusion (2013)92 states that, ―…in a normal
Customer Due Diligence (CDD) scenario, the FATF Recommendations do not require
information to be gathered on matters such as occupation, income, or address, which
some national AML/CFT regimes mandate, although it may be reasonable in many
circumstances to seek some of this information so that effective monitoring for unusual
transactions can occur.‖ The FATF Guidance also expresses a concern that93: ―There are
potentially negative consequences if the controls designed for standard risks and higher
risks are also applied to situations where the risks are lower. This ―over-compliance‖
approach by regulators and financial institutions could exacerbate financial exclusion risk,
thereby
increasing
overall
money
laundering/terrorism
financing
risk.
Regulators/supervisors should play a role and provide further guidance when institutions
overestimate money laundering/terrorism financing risks or adopt overly-conservative
control measures.‖ The US Code of Federal Regulations governing this aspect of banking
(31 CFR 103.121) not only does not require banks to verify the current address but defines
address extremely broadly to mean: ―For an individual: a residential or business street
address, or if the individual does not have such an address, an Army Post Office (APO) or
Fleet Post Office (FPO) box number, the residential or business street address of next of
kin or of another contact individual, or a description of the customer‘s physical location.‖
The current approach being followed by the RBI is to allow customer accounts to be
opened without any documentary proof of identity or current address if the amounts
involved are less than Rs.50,000 and to insist on both once that limit is crossed94. The
Committee believes that a superior approach would be to insist on a strong proof of
identity like Aadhaar in all cases and to require financial institutions to internally develop
their own risk based processes which are linked to transactions monitoring and usage
patterns to identify and address high risk cases once identity has been clearly established.
This approach, in the Committee‘s view, particularly with the advent of Aadhaar, will
make it much easier for multiple channels of financial access to become fully engaged in
the task of ensuring universal access to payments and savings services. It will also serve to
converge the KYC requirements of multiple financial and non-financial regulators making
the process of customer acquisition and customer migration from one service provider to
another much easier and more importantly, at lower costs. If this issue is clarified, the
recently announced e-KYC guidelines95 for example, can significantly accelerate the
process of account opening.
60
Payments and Savings: Introduction and Strategic Direction
Customer Authentication
As the payments network is sought to be scaled up, the manner in which a customer is
sought to be identified and authenticated so that repudiation and fraud risks are
minimised, becomes very important. Aadhaar is the crucial piece of infrastructure in this
regard. If each of the payments points is enabled with an acquiring device with biometric
capability, identification and authentication of the customer become very secure.
However, there are three concerns on this issue, one that the authentication and
transaction platform represents an additional investment of Rs. 15,000 for the transaction
point and whether the merchant will be willing to invest in this; two, given that Aadhaar
has not been activated as of this date for about 50 per cent of the population and that
there are entire states such as Chhattisgarh and Madhya Pradesh which have low
penetration, there may be a need for some intermediate solutions; and three, given the
slow roll-out of broadband and GPRS, biometric authentication may not be feasible in the
most remote parts of the country. In order to build ubiquity each of these issues needs to
be addressed carefully:
1. The cost of biometric authentication devices is expected to fall sharply over a period
of time due to the multiple-vendor architecture as well as developments in integrating
biometrics with phones. Even in the current context if the merchant in-charge of the
payment access point has a smart phone already then the add-on biometric device
costs only Rs.3,000. This cost is sufficiently low that either merchants would invest in
it themselves or the government could launch a scheme through the UIDAI to give
these devices away.
2. Currently, India has an optical fibre network at the block level. Bharat Broadband
Network Limited (BBNL) has initiated National optical fibre network (NOFN) project to
provide connectivity in 2.5 lakh gram Panchayats in India. The Recent TRAI report:
―Recommendations on Improving Telecom Services in the North-Eastern states: An
Investment Plan‖, makes valuable suggestions on improving telecommunications and
optic fibre outreach in the context of the North-Eastern states.
3. State Governments need to coordinate more closely with UIDAI, NPR, and BBNL to
ensure rapid coverage of their states for both Aadhaar as well as broadband. The
Committee recommends that authentication for the purpose of transactions happen in
either of three ways:
a. Fingerprint in combination with the Aadhaar number or the bank account number
(Token-less authentication)
b. One-time Password (OTP) in combination with the Aadhaar number or the bank
account number (Token-less authentication)
c. PIN in combination with the Aadhaar number or the bank account number (Token
authentication)
In the context of a UEBA, at the time that the account is created or an Aadhaar number is
generated, the customer also provides her mobile number which is then mapped to her
Aadhaar number and UEBA. Using this information where the customer does not have
access to a payment access point, assuming that she has not changed her mobile number,
she could request that a One-Time-Password (OTP) be sent to her registered mobile phone
number so that she can then use it in combination with her Aadhaar number to
authenticate herself. Developing additional alternative authentication strategies, in the
Committee‘s view, would only delay the entire process.
61
Payments and Savings: Introduction and Strategic Direction
Rural Branching Mandate
As discussed in Chapter 2.2, there still is a large gap between the number of full-service
access points required for financial inclusion particularly as it concerns payment services
and deposit products. While it is possible that the strong emphasis on achieving priority
sector outcomes by building specialisations and the inclusion of newer business models and
participants would have the effect of automatically and quickly filling in this gap, the
Committee feels that just as in the case of PSL requirements, the time is not yet
opportune for the complete removal of the 25 per cent rural branching requirement for
unbanked rural (Tier 5 and Tier 6) centres96. It welcomed the fact that in order to suit
customer requirements RBI has already changed its understanding of what constitutes a
branch97. However, it felt that there is need for additional clarification on issues such as
the nature of services provided, hours of operation, and the number of days/week that it
should be open. The Committee proposes that under the rural branching mandate, a
qualifying branch be understood to have the following features:
1. Minimum services available: account opening with e-KYC on an off-line mode, cash in,
cash out, transfer initiation, balance enquiry.
2. Minimum hours of operation: 1,000 working hours per annum.
3. Minimum days of operation: 100 days.
4. Nature of employment of staff: not applicable/any.
5. Minimum infrastructure configuration: ability to directly transact on bank‘s CBS, ability
to print an account statement.
6. Nature of ownership of infrastructure and premises: not applicable/any.
7. Minimum customer protection: bank takes full responsibility for all banking related
grievances of the customer, customers covered by branch audit process of the bank,
secured authentication as per bank‘s internal guidelines and extant RBI regulations.
The Committee also recommends that the policy of mandatory rural branching be
reviewed regularly and be phased out once the goals specified in the vision statement for
payments services and deposit products have been achieved.
Designs
The next few chapters in this section of the report will examine each relevant bank and
non-bank channel carefully for its potential to serve small businesses and low-income
households and, where necessary, make recommendations on how the channel could be
strengthened and its potential better realised. The institutional designs that are relevant
for the provision of payments and savings services in the Indian context are given below.
Each of these designs and their variants has been described earlier in Section 4 in some
detail:
1.
2.
3.
4.
National Banks operating through their branches or through agents;
Regional Banks;
Payment Network Operators (PNO); and
Payments Banks.
Recommendations:
3.1
Every resident should be issued a Universal Electronic Bank Account (UEBA)
automatically at the time of receiving their Aadhaar number by a high quality,
national, full-service bank. An instruction to open the bank account should be
initiated by UIDAI upon the issuance of an Aadhaar number to an individual over
the age of 18. The bank would need to be designated by the customer from
amongst the list of banks that have indicated to UIDAI that they would be willing to
open such an account with the understanding that it would attract no account
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Payments and Savings: Introduction and Strategic Direction
opening fee but that the bank would be free to charge for all transactions,
including balance enquiry with the understanding that such transactions‘ charges
would provide the host banks with adequate compensation. The Bank would be
required to send the customer a letter communicating details of the account thus
opened. The Committee recommends that the RBI issue a circular indicating that
no bank can refuse to open an account for a customer who has adequate KYC which
specifically includes Aadhaar. [Identical to Recommendation 5.1]
3.2
RBI should require a strong Proof of Identity (POI) for each and every customer and
a documentary proof of one national address but waive the requirement of
documentary proof for the current address, for the purpose of opening a fullservice bank account. It should instead enjoin upon banks to carry out careful
tracking of usage and transactions patterns to ascertain the risk levels of the
customer and take necessary action based upon risk-based surveillance processes
developed internally by each bank. [Identical to Recommendation 5.2]
3.3
Under the existing rural branching mandate, a qualifying branch may be understood
to have specified features regarding minimum services available, minimum hours of
operation, nature of employment of staff, minimum infrastructure configuration,
nature of ownership of infrastructure and premises, and minimum customer
protection. In addition, this mandate is to be reviewed regularly and be phased out
once the goals specified in the vision statement for payments services and deposit
products have been achieved.
3.4
Aadhaar is the key piece of infrastructure to enable a customer to be identified
and authenticated so that repudiation and fraud risks are minimised and therefore
should become the universal basis for authentication. However, with slow
enrolment in some areas and low penetration of biometric devices and internet
network connectivity in many areas, intermediate authentication methods such as
PIN numbers and OTP could be used. State Governments need to coordinate more
closely with UIDAI, NPR, and BBNL to ensure rapid coverage of their states for both
Aadhaar and broadband.
63
Payments and Savings: National Bank with Branches
Chapter 3.2
National Bank with Branches
Design Description
This is a design that comprises large scheduled commercial banks that operate on a
nation-wide basis or a supra-regional basis using traditional branch banking and have the
capacity to provide the full suite of payment and savings services including electronic bank
accounts, payments services, and a full-range of savings products.
High Cost to Serve
In the context of bank accounts with small-value deposits or nil balances, the branch
becomes a very high cost-to-serve channel for banks. Currently, RBI requires all banks to
open a certain number of accounts in un-banked areas. The first generation of these
accounts were referred to as ―No-Frills Accounts‖ (NFAs) and had very little functionality
beyond local deposits and withdrawals. The absence of integration with the Core Banking
platforms (CBS) of the banks had created this situation. More recently, RBI has mandated
that all these NFAs need to be converted to ―Basic Savings Bank Deposit Accounts‖
(BSBDAs) accounts with a minimum set of features including inter-operability between
different banks. Progress on this has been slow because from the bank‘s perspective, the
principal barrier is the cost of opening these BSBDAs without clear visibility on account
balances and usage levels.
The traditional bank branch is neither an effective nor an efficient channel for directly
serving low-income households and small businesses for their basic payments and savings
product needs. There is also the added factor that branches have limited working hours
and are fundamentally not suited for the ―anytime access‖ that customers need. There is
sometimes a view that is expressed that income from credit products that are offered to
low-income households and small businesses will be able to compensate for losses from
savings products. However, as is discussed in detail later in the section on credit products,
for loans less than Rs.5 lakh in value, the bank-branches have shown themselves to be an
extremely high cost and high-risk credit channel.
Valuable National Resource
Despite these limitations, from a financial inclusion perspective, the branch infrastructure
of the banks continues to represent an invaluable national resource that can be more
effectively utilised to provide a number of important services on the payments and savings
front:
1. Branch as a Gateway: For larger businesses and upper income households who would
necessarily seek to build integrated relationships with their financial services provider,
as the proportion of such households grows even in rural and semi-urban areas,
branches would become an essential component of the delivery strategy of any
financial institution for both payments and credit. For small businesses and low-income
households that seek to graduate from their relationships with local providers, the
presence of such ―gateways‖ to National Banks would be invaluable. In order to freeup capacity to service such customers and to thus maximise their own profitability,
branches of National Banks could be strongly encouraged to use agent based models to
address routine requests from all customers and all requests from small businesses and
low-income households. They would also need to slow down the growth of such
branches to match the requirements of larger businesses and upper income households
otherwise they risk adversely impacting their own profitability and thus have a
negative impact on the stability of the financial system as a whole.
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Payments and Savings: National Bank with Branches
2. Branch as a Cash and Cheque Management Hub: With strong support from the RBI, even
if e-money becomes the dominant medium of exchange it is likely to take a number of
years and notes in circulation are likely to have an important role. In this context
branches, with their strong rooms, trusted and highly trained personnel, and a close
relationship with the RBI could become operators of a much larger number of RBI
Currency Chests so that both dematerialisation and re-materialisation of currency
notes to and from e-money can happen smoothly at a number of locations spread-out
nationwide. For the provision of these services these branches could be paid out a
service charge.
In terms of its core business, a framework could be developed that allows each bank
branch to operate in a fully inter-operable manner vis-à-vis other banks. For example
while cash-in, cash-out, and remittances can be handled at agent locations in an
interoperable manner, only bank branches currently have the ability to handle
cheques. Cheque clearing, can be carried out by branches in an inter-operable manner
as the Cheque Truncation process does not require the physical cheque issued by the
drawer to be presented for clearing. This could become yet another source of feeincome for bank branches.
3. Branch as an Enrolment Hub: Similarly there will be a continuing need to ensure that
customers are properly identified and their electronic identities established. Once the
current ―camp-mode‖ of providing Indian residents with Aadhaar numbers concludes,
given their extensive presence, bank branches could become a very good system-wide
resource for the issuance of Aadhaar numbers and for the careful verification of proof
of identity and proof of address documents submitted by residents.
4. Branch as a Risk Management Hub: Experiences both globally as well as in India clearly
point to fact that while from a cost perspective the branch is an expensive resource,
from a risk management perspective, in an environment where multiple channels will
be deployed by the Bank to serve the low-income household and the small business
customer, the branch does have an important role to play, particularly if the branch is
organised in a manner that allocates substantial decision making powers to it and
tracks its overall performance using metrics such as RAROC – thus creating a full
―bank-in-a-bank‖ model.
65
Payments and Savings: National Bank with Agents
Chapter 3.3
National Bank with Agents
Design Description
This design refers to banks that seek to extend the reach of their branches through the use
agents. It is one of the ways employed by them for reducing costs and improving outreach.
Under current regulation an agent used by the bank for these purposes is referred to as
the Business Correspondent (BC).
Low Financial Viability
This is a very powerful channel and countries such as Brazil have ensured that vast
segments of their populations have been covered by the Business Correspondents of
existing commercial banks. Every municipality in Brazil is reached by banks with 1 in 4
municipalities being served only by business correspondents. In 2008, bill payments
comprised 75 per cent of volume and 70 per cent of value transacted through Brazilian
correspondents98. Various studies reveal that in absolute terms, the number of BC points in
rural India is very large and showing very encouraging signs of growth both in rural and
urban areas. As of March 2013, there were 2,21,341 business correspondents engaged by
banks, having grown by 548 per cent since 2010.99 However, the fraction of them actively
transacting is very low, particularly in rural areas and low-income urban neighbourhoods
where they are most needed and alternate channels such as ATMs are not available 100. This
has resulted in an absence of financial viability and several have now started to shut
down. Field research by College of Agricultural Banking, CGAP, and MicroSave suggest that
over 75 per cent of accounts opened and over 25 per cent of BCs are dormant101.
This suggests that urgent action needs to be taken if all the investments that have been
made in building these networks are to result in the financial inclusion benefits that were
anticipated when the channel was originally conceived. The financial viability of the
Business Correspondent, particularly in rural areas, is a key challenge but a number of
steps can be taken to address it. The core of the strategy for doing this has three
components – improve revenues by exploiting existing or building new ―adjacent‖ revenue
streams, ensure fair compensation for services provided by the agent, and reduce costs.
Building Adjacencies
―Adjacencies‖ can arise from three sources: transactions, credit, and the real-sector.
1. Transactions Adjacencies: Instead of treating the BC as an independent third-party
operating on a stand-alone basis, some banks have successfully integrated them
seamlessly into their day-to-day operations. Routine transactions of all customers such
as balance enquiry, balance statement, and small-value cash-withdrawals are all
handled by the Business Correspondent thus allowing the branch itself to focus on high
value customers and transactions. The savings in costs that have accrued to the branch
have more than paid for the fixed costs associated with operating this channel and
have allowed the bank to extend the reach and profitability of its entire operations in
its command area. Dena bank illustrates such an arrangement with its BC wherein it
pays a monthly remuneration of Rs. 2,000 plus commissions for carrying out operations
such as account opening, organising financial literacy camps, sourcing loans resulting
in sanction and disbursal, maintaining records, and post-sanction monitoring and
recovery of loan accounts.
2. Credit Adjacencies: The services of the BC can also be employed to provide access to a
broader range of financial services, including credit and insurance so that he now has
multiple revenue streams. While, as discussed later in Chapter 6.1, the existing BC
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Payments and Savings: National Bank with Agents
model does not lend itself very well to such an approach being adopted, there are
ways in which the BC can be made into a stronger credit originator for the Bank and
thus acquire this adjacency effectively but this may well come at the cost of ubiquity
since not all BCs would be able to benefit from this adjacency.
The other alternative is for the bank to work with ND-NBFCs as their BCs. These
entities currently offer credit on their own account and are regulated like banks in
their discharge of that function but, under extant regulations, are not permitted to act
as BCs. This stems in part from the concern around the isolation of the cash from
deposits collected by the BC on behalf of the bank from the lending activities of the
NBFC (comingling risk), and in part from the desire to ensure that banks do not
inadvertently end-up strengthening a potential competitor on the assets side
(competition risk). The issue of ―competition risk‖ is very much a commercial one and
is best left to the bank to resolve as it builds out its partnerships. Even the former
issue is related to how the bank is able to ensure that the funds of its customers are
not comingled with that of the funds of the ND-NBFC. With technology enabling intraday clearing of funds, it is not obvious that this is anymore a risk factor that cannot be
managed by a bank. Regulation should permit ND-NBFCs to be BCs for National Banks
where they can take deposits on behalf of the National Bank and offer credit from
their own balance sheet or in risk-sharing partnerships with that bank or any other
bank. ND-NBFCs have a vast reach on the ground and those that are classified as NBFCMFIs in particular are able to access customers well beyond the reach of the bank
branches. BC partnerships between banks and such NBFCs could prove to be very
valuable.
3. Real Sector Adjacencies: Real sector adjacencies obtain when BCs provide access to
payments as well as a broader range of non-financial services such as mobile phone
top-ups and retailer revenues. This approach extends what existing merchants with
POS terminals do in urban areas into the rural context. Globally large non-financial
companies offer payment services to increase the potential to garner new revenues.
For instance, Diconsa, an operator of 22,000 grocery stores in rural Mexico, began a
program to deliver cash payments from government benefit programs to people in its
stores. Since they began doing this, they have seen customer visits and foot traffic
increase by 20 per cent102.This model of ‗adjacent‘ non-financial revenue possibilities
seems highly scalable without creating additional risks to the financial system. Similar
partnerships are being explored in India between banks and Community Service
Centres (CSC) as well as mobile phone companies and have demonstrated a great deal
of potential for growth. Many CSCs already facilitate the opening of savings accounts,
the distribution of government payments, and the distribution and processing of loans
and Kisan Credit Cards103. Axis Bank, for instance, has partnered with Airtel and Idea to
leverage their wide outreach in rural areas.
Adequacy of Fees
These are principally related to when BCs intermediate G2P payments and when they
support other transactions.
1. G2P Payments: The Report of the Taskforce on the Aadhaar-enabled Unified Payments
Infrastructure recommended that a fee of 3.14 per cent (subject to a cap of Rs. 15.71
per transaction) be paid for Direct Benefit Transfer (DBT) payments originating from
governments. However government departments have been reluctant to pay these fees
to the banks. This situation needs to be urgently corrected if the governments are to
realise the benefits of DBTs actually reaching the end-beneficiary. The Madhya Pradesh
State Government has followed an entirely different path and has ensured, through a
heroic coordination and database creation effort, that all the government schemes
67
Payments and Savings: National Bank with Agents
pay-out electronically and do so through a single bank / BC location in every 5
kilometre radius (implying an area of about 80 sq. km.) which also includes the bank
account of the Panchayat. This has allowed them to successfully make the DBT
payments in some of the poorest parts of the State104 while ensuring that the branches
and BCs that provide these services remain viable despite very low levels of fees being
paid to them by the government on account of the sheer volume of money flowing
through them. It is hard to see however, how such an effort, while highly admirable,
can be replicated elsewhere or even extended deeper into those very regions to
provide comprehensive financial services beyond DBT, in the absence of an adequate
amount of fees being paid out by the State Government.
2. Charging for services: A rural BC carries out between 1 and 10 transactions per day
while an urban agent does 10 to 60 transactions a day. However, despite this, banks
are much more willing to charge urban customers than they are rural customers. For
instance, on a deposit of Rs. 5,000 an urban customer is charged 2 per cent (or Rs.
100) while the same transaction for a rural customer yields a total charge of Rs. 6 to
be shared between the Bank and the BC105. As discussed earlier, while there is no
regulatory barrier, banks would need to allow the BC channel to charge a remunerative
fee to the customer if the BC channel is to thrive.
Reduction of costs
While the BC provides an additional channel for Account Opening that is proximate to low
income households, the account is hosted with the Sponsor Bank. As a result, the costs
associated with account opening and maintenance discussed in the earlier chapter, are
applicable here as well. These costs, particularly those associated with Information
Technology and the high level of branch-personnel engagement in the process of account
opening would need to be resolved to ensure the viability of this channel as a whole.
Interoperability of BCs
Another key limitation that has severely restricted the number of transactions that are
being carried out by each BC is the fact that it is restricted to operating only those
accounts directly opened by it within the parent bank. Given multiple banks and multiple
schemes, it is entirely possible that the members of the community hold bank accounts
with multiple banks. A BC with full inter-operability would be able to easily give them
access to their own bank accounts despite being appointed by another bank. There are no
regulatory barriers to accomplishing this106. A number of banks have activated this and an
inter-change price has been agreed to as a result of the efforts of the IBA. The only barrier
now is for each bank to migrate their legacy No-Frills Accounts to an inter-operable switch
and follow the RBI guidelines on BSBDAs. There is slow progress on this front.
Specific Regulatory Barriers
There is also value in eliminating regulatory barriers that are preventing the effective
utilisation of this channel. In particular historically there are several approvals available
to merchants that operate POS Terminals in urban India which, for some reason, have
been taken away from rural BCs who offer an identical functionality. These need to be
made available to the entire BC network as well. These include:
1. NBFCs are not permitted to own and operate BC networks while they are permitted the
same for ATMs and POS terminals. The concern that has been expressed here is that
there may be potential for conflict of interest because the NBFC is a lending channel
and may co-mingle deposits raised through its BC activity. The Committee is of the
view that this may be left to the judgment of banks. There are adequate technology
solutions available to do intra-day reconciliations between the Bank and its BC.
68
Payments and Savings: National Bank with Agents
2. There are distance criteria (30 km for rural and 5 km for urban) which are specified in
terms of the distance between the BC and a branch of the Sponsor Bank, while there is
no such restriction for ATMs. The concern that has been expressed here is that some
branch oversight of BCs is required from a cash management and operational
perspective. The Committee is of the view that this may be left to the judgment of
banks to decide.
BC Networks
There are two types of BC networks emerging in the country – one established directly by
the bank through their branches and others created by various government and private
sector entities. There are a number of benefits and challenges associated with each of
them.
1. Pay Parity: Demands for pay and job parity from individual BCs directly engaged by
bank branches. This concern arises from a similar experience that banks had when the
―pygmy banking‖ scheme was deployed by them several years ago. Ensuring that each
BC has adequate work and is able to earn more on the basis of increased effort and
engagement would be the best way to address this concern.
2. Technical Support: Poor technical support provided by branches to individual BCs
particularly in case of breakdown of machinery. Ensuring that the contracts with
equipment providers include a provision for on-going maintenance will be key to
addressing this issue.
3. Performance of CSPs: Low performance by the Customer Service Points (CSPs) of
corporate BC networks. The concern here is that while corporate BC networks are able
to successfully address the human resources and technical support issues, the quality
of performance by their CSPs has a highly variable nature. Compensating corporate BC
networks adequately, building in strong penalties for non-performance, and getting
branches engaged in the supervision of the CSPs would all be key aspects of addressing
the performance issue of CSPs.
Recommendations:
3.5
Restore the permission of ND-NBFCs to act as BCs of a bank. Concerns around
commingling can be effectively handled through technology-based solutions such
that all settlements happen on an intra-day basis. In addition, eliminate the
distance criteria between the BC and the nearest branch of the sponsor bank.
Allow Banks to decide operational criteria.
3.6
The Taskforce on Aadhaar Enabled Unified Payment Infrastructure recommended
that State Governments pay a fee of 3.14 per cent (subject to a cap of Rs. 15.71
per transaction) for Direct Benefit Transfer (DBT) payments originating from
governments. RBI should enjoin upon State Governments to implement the same.
69
Payments and Savings: Regional Bank
Chapter 3.4
Regional Bank
Design Description
This is a design in which there are several regionally focussed full-service banks, each
relatively small in size, which offers credit, deposits, and payments services. This design is
also sometimes referred to as ―Small Banks‖ or ―Community Banks‖. These banks are
supervised by the RBI through NABARD and are governed on a day-to-day basis by their
local boards. The Cooperative banks though licensed by RBI are registered under the
respective State Cooperative banks. A Regional Bank does not use capital markets for its
resource raising. While cooperative banks with their network of PACS do not use agents in
any form to reach their customers, the RRBs in addition to their branches, have begun to
deploy BCs and CSPs to reach out to their clients. As on 30th September 2013, RRBs have
deployed 30,352 BCs and 24,279 CSPs107.
Poor Technology Infrastructure
Regional Banks have lower human resources and infrastructure costs and are closer to the
customer and are therefore, better equipped to originate deposits and offer payment
services vis-à-vis National Banks that operate through branches. They also have an
extensive branch network and very large existing customer bases with the potential to add
new ones relatively easily108. They have experienced personnel who have had many years
of experience and training in handling cash and have well developed cash management
and fraud-control processes. They are also well equipped to handle all the traditional
banking instruments such as cash, cheque, demand drafts, and can relatively easily be
trained in the use of new devices that work with biometric authentication. The
environment of a branch offers the customer safety and privacy that compares very
favourably with that offered by a local agent.
While there has been some progress, more effort is urgently needed to complete the task
of upgrading the technological infrastructure of these banks. As on 31 October 2013, 23 of
the 31 StCBs and 257 of the 370 DCCBs were on the CBS platform and will be offering
technology based services such as NEFT and ATM by 31st March, 2014. While PACS are yet
to fully embrace technology, a few State Governments such as those of Odisha and
Gujarat have initiated the process of computerising them109. Such measures will make
them very well placed to offer a much broader range of savings products to their
customers as well as connect smoothly with national platforms such as RTGS.
Significant Challenges on Credit
However, a significant challenge that they face is in regard to deployment of their
resources since their local nature also makes them more prone to ―capture‖. This has led
to persistent governance problems and owing to the higher exposure that they have to
local systematic risk (weather, crop prices, and regional economic performance), they are
likely to have to pay a higher rate to their depositors which in turn, might create the need
to make ―riskier‖ loans resulting in a vicious cycle of rising non-performing assets and
eventual losses to their depositors. Addressing these issues is likely to be difficult but
feasible for those institutions and State Governments that are willing to resolve them
effectively. Possible directions that this effort could take are discussed in detail in
Chapter 4.6.
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Payments and Savings: Regional Bank
Payments Bank
Regional Banks that are demonstrably unable to perform the credit function could move
towards an environment in which they are able to function purely as Payments Banks.
While this would be an option available to all banks, it could be mandated for those
Regional Banks that have a non-investment grade rating from an independent rating
agency or a low internal supervisory rating from the RBI.
Branch as a Cash & Cheque Management Hub
As in the case of National Bank with branches, the branch network created by RRBs and
DCCBs represents a useful infrastructure that should be leveraged effectively. Therefore
existing rural branches of Regional Banks should be made inter-operable and act as
acquirers for all transactions in that region and the regulator must allow Regional Banks to
charge a fee for providing inter-operability. Unlike National Banks with branches, not all
Regional Banks have a Core Banking solution at present, though this process is on-going. In
order to even move in the direction of interoperability, this will be a fundamental
prerequisite.
71
Payments and Savings: Payment Network Operator
Chapter 3.5
Payment Network Operator
Design Description
A payment network operator is responsible for interoperability, interconnectivity,
clearing, and settlement between various payment ecosystem providers such as NPCI,
Visa, MasterCard, RBI, and clearing houses such as NEFT.
These are very important channels through which a very wide variety of customers, both
low-income and middle-to-high income are able to access the payments systems and their
savings and credit accounts with various banks and financial institutions. RuPay cards have
been recently issued to farmers that have KCC accounts and represent a promising lowcost innovation. VISA, Mastercard, and RuPay are PNOs that have direct access to the
settlement system without the need to process their payments through a sponsor bank
even though all their cards are issued only in collaboration with a bank.
Contagion Risk Concerns
Historically ATMs in India have been an integral part of a bank network. As a recent
innovation White Label ATMs (WL-ATMs) have been permitted to emerge as independent
PNOs. There are currently 2 White Label ATM operators authorised by the RBI, namely
Prizm and Tata Communications110. However, currently White Label ATMs (WL-ATMs)
require a sponsor Bank at the back-end that is linked to the payment and settlement
system. The WL-ATM directly does not have access to the settlements system. As discussed
in Section 2, this ‗nested‘ design where the PNO speaks to the settlements system through
the Sponsor Bank is fraught with contagion risk. If the WL-ATM grows very large compared
to the Sponsor Bank, it could create undesirable levels of contagion risk from the PNO to
the Bank. In order to prevent this build-up of risk, the WL-ATM could be given direct
access to the settlement system.
White-Label BC
A challenge faced by Corporate BCs today is the extent of dependence on the Sponsor
Bank, oftentimes for simple operational decisions such as the hiring and location of
agents. BCs also tend to be constrained for liquidity on account of high levels of Account
Receivables from Banks111 and a high level of variability in the interest that the bank and
its branch managers have in supporting this network. This level of dependence and the
business uncertainty that arises as a consequence is not conducive to long-term planning
and growth of the BC channel and nor is it desirable for each bank to try and put in place
parallel networks making it difficult for even one of them to be viable, on account of
fragmentation of the business. The National Bank with BC design must be enabled to grow,
and one way to enable this is by allowing high-quality, independent White Label BC
Network Operators to emerge as PNOs which can also increase penetration of payment
points in the country. This has already happened in the context of ATMs and the objective
here would be to loosen the tight coupling between the BC and a Sponsor Bank by allowing
the BC greater operational flexibility as well as more degrees of freedom in determining
charges to customers. The White Label BC should be fully inter-operable and will have the
ability to work with multiple banks at the back-end. Potential candidates for such a
license could include NBFCs, existing corporate BCs, mobile phone companies, consumer
goods companies, the post office system, and real sector cooperatives
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Payments and Savings: Payment Network Operator
Parameter
Independent access to
settlement system
Need for a sponsor bank
Table 3.5.1
ATM-BC Comparison
Bank ATM
Bank BC
White Label ATM
No
No
Yes
Yes
Yes
No
White Label BC
Yes
No
Emergence of Money Services Businesses
With the emergence of NPCI‘s Immediate Payments Service which can allow individuals to
transmit money to each other and to and from merchants using mobile phones, even with
different banks hosting their bank accounts, there is the very real and very welcome
possibility that there will be rapid and spontaneous proliferation in the network of
individuals and merchants that are willing to participate in ―money services businesses‖
allowing purchase and sale of goods as well as cash-in-cash-out and remittance services
using mobile based transactions to grow rapidly. In the Committee‘s view the RBI should
be supportive of this trend but require those individuals, merchants, or large companies
that wish to become formal Money Services Businesses (MSBs) and advertise themselves as
such, to register themselves with local State level authorities and place a deposit with
them of an appropriate amount and sign an undertaking to follow a suitable ―Fair
Practices‖ code. This has very much been the practice followed in the USA for example to
govern the behaviour of the various Check-Cashing Businesses that have proliferated.
RBI should provide an enabling environment for such MSBs to emerge and once it appears
that significant players could emerge in this space, issue clear guidelines on licensing and
authorisation of MSBs. MSBs in the US, for instance, are governed by State level statutes.
The Vermont statutes on banking and insurance covering MSBs for example, provides
detailed guidance on eligibility for becoming an MSB and the process for obtaining an MSB
licence. There is a one-time application and licence fee of USD 1,000 and the issuance of a
licence is based upon a thorough investigation of the applicant‘s financial condition and
responsibility, financial and business experience, character, and general fitness112.
Recommendations:
3.7
In order to address contagion risk concerns, instead of requiring White Label ATMs
to access the settlement systems in a ―nested‖ manner through a sponsor bank,
provide them direct access to the settlement system subject to certain prudential
conditions, to mitigate operation risk.
3.8
In order to ensure that the BC infrastructure that is established is utilised in an
optimal manner and shared by multiple banks, which may each have account
holders in a specific geography, allow high-quality White Label BCs to emerge with
direct access to settlement systems subject to certain prudential conditions. This
would be similar to Recommendation 3.7 vis-à-vis mitigating operations risk in the
White Label ATM network.
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Payments and Savings: Payments Bank
Chapter 3.6
Payments Bank
Design Description
This design is functionally equivalent to a recently introduced class of companies called
pre-paid instrument providers (PPIs) that are permitted to receive cash deposits from
customers, store them in a digital ―wallet‖, and allow customers to pay for goods and
services from their digital ―wallet‖. These companies are currently permitted to accept a
maximum amount of Rs.50,000 in their ―wallet‖ from their customers and are required to
maintain an escrow account with a scheduled commercial bank where these aggregate
amounts received from customers are credited immediately upon receipt. There are
currently 27 PPIs authorised by the RBI under the Payment and Settlements Act, 2007113.
These players have enabled significant expansion of low-value payments services among
individuals who hitherto have never used banking services.
Even globally, similar innovations have taken root and gone further than they have in
India. Most jurisdictions have created room for the participation of non-bank institutions
in enabling payments. In 2007, the EU adopted the Payment Services Directive (PSD) for a
harmonised legal framework for retail payment services. The PSD contains both prudential
requirements and civil law provisions pertaining to the various payment service providers
and the payment services they provide. To promote competition, a new group of payment
service providers, the so-called ―payment institutions‖, has been created. They can offer
payment services without being a bank and do not have to cover the entire range of
services provided by a bank. In addition, the rules pertaining to the execution of
transactions have been clearly defined114.A BIS report on payments states that, in Japan,
non-banks are allowed to provide funds transfers. In South Africa, non-banks can become
designated clearing system participants and have full access to the clearing system
provided that they meet the Central Bank‘s requirements115.
Given all these developments, any financial inclusion strategy would not be credible if it
did not envisage a clear role for independent non-bank participation in the provision of
payment and deposit services.
Pre-Paid Instrument Providers
1. KYC Issues
PPIs have been provided relaxed KYC requirements for their customers116 in exchange for
limiting the value of transacted amounts on a wallet to Rs. 50,000 and restricting cash-out
on wallets to banking outlets alone. Recognising that not allowing cash-out represents a
key limitation of the product, a limited pilot has recently been permitted to the PPIs for
cash-out. While the restriction of transaction amounts may be justified given that the
focus of PPIs is to enable payment services for unbanked individuals, these two measures
do not provide adequate protection against AML/CFT risks. Given the growing spread of eKYC, it may be feasible for PPIs to benefit from this and have KYC standards at par with
banks, particularly if the stipulation to obtain documentary evidence for current local
address is removed for all providers, including banks.
2. Customer Authentication
As the PPI network is sought to be scaled up, the manner in which a customer is sought to
be identified and authenticated so that repudiation and fraud risks are minimised,
becomes very important. As in the case of KYC, Aadhaar is the crucial piece of
infrastructure in this regard. If each of the payments points is enabled with an acquiring
device with biometric capability, identification and authentication of the customer
74
Payments and Savings: Payments Bank
become very secure and concerns regarding AML/CFT are also addressed satisfactorily.
However, there are three concerns on this issue, one that the authentication and
transaction platform represents an additional investment of Rs. 15,000 for the transaction
point and whether the merchant will be willing to invest in this; two, given that Aadhaar
has not been activated as of this date for about 50 per cent of the population and that
there are entire states such as Chhattisgarh and Madhya Pradesh which have low
penetration, there may be a need for some intermediate solutions; and three, given the
slow roll-out of broadband and GPRS, biometric authentication may not be feasible in the
most remote parts of the country. As discussed earlier, these concerns are either not
serious ones or are expected to get resolved in the near future. While Aadhaar is essential
for account opening, it is not essential for account operations. The Committee
recommends that authentication for the purpose of transactions happen in either of three
ways:
a. Fingerprint in combination with the Aadhaar number or the bank account number
(Token-less authentication)
b. One-time Password in combination with the Aadhaar number or the bank account
number (Token-less authentication)
c. PIN in combination with the Aadhaar number or the bank account number (Token
authentication)
Developing additional alternative authentication strategies, in the Committee‘s view,
would only delay the entire process.
3. Savings Product Designs and Payment of Interest
Currently PPIs are prohibited from paying interest on the balances held by them in the
customer‘s digital ―wallet‖. Given that balances in wallets may represent substantial
amounts relative to the savings of low-income households in particular, it seems very
important to find a mechanism to pay interest on these balances. However, in the current
environment, PPIs do not earn interest on their escrow balances with the sponsor bank and
hence their ability in turn to pay interest to their wallet customers also would be
constrained even if they were permitted to do so.
4. Contagion Risk
There is also the concern about the safety of funds being held by the PPIs that arises from
contagion risk. If the sponsor bank fails for some reason then since the amounts held by
the PPI with the sponsor bank are at risk, the amounts held by individuals with the PPI are
also at risk and do not enjoy the benefit of deposit protection unlike the direct depositors
of the sponsor bank itself. Such a nested approach creates opacity and screens the buildup of risk in the system. The PPI has to take a view on the riskiness of its Sponsor Bank
that holds its deposit balances and the Sponsor Bank has to worry about the operating
quality and the likelihood of a ―run‖ on its partner PPIs117. All nested structures have this
feature and there may be greater stability obtained from independent designs where the
PPI deals directly with the RBI rather than through a Sponsor Bank.
There is global evidence of a shift in this direction. Brazil‘s law 12865 creates a new legal
entity known as a "payments institution," which will be regulated by the Brazilian Central
Bank. Under the law, electronic money is not considered a deposit and is issued by a third
party under a licence from the financial sector authority. Digital wallet providers, card
issuers, and mobile network operators are eligible to apply for payments institution
licences. Initial minimum capital requirements have been established by Circular 3683
(Brazilian Real 2 million), and Circular 3681 includes several risk management
requirements (including a minimum net equity). Licensed payments institutions will be
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Payments and Savings: Payments Bank
granted access to the clearing and settlement facilities operated by the Central Bank, but
they are not mandated to use it. Upcoming circulars/resolutions will likely elaborate on
this point. The balance of payment accounts must be fully allocated to a specific account
at the Central Bank, or else in federal government bonds, as established under Circular
3680. Moreover, this circular allows for simplified KYC procedures for low-value pre-paid
payment accounts118.
South Africa is another country that has ventured in this direction. In 2007, the South
African Reserve Bank acknowledged that non-bank Payment Service Providers (PSPs) have
an important role to play in the payments system. The Reserve Bank published directives
in 2007 regulating their participation in the payments system. By the end of 2008,
amendments were made to the National Payment System Act to provide the Reserve Bank
with the mandate to designate non-banks as designated clearing system participants,
thereby formalising their participation in the payments system119.
Payments Bank
Given these significant concerns with the current PPI model with respect to KYC, inability
to pay interest on balances, and contagion risk; and taking into account the need to
urgently provide access to payment services and deposit products to millions of
individuals, the Committee recommends that a set of banks may be licensed under the
Banking Regulation Act, which may be referred to as Payments Banks. Potential candidates
for such a license could include separately capitalised subsidiaries of NBFCs, existing
corporate BCs, mobile phone companies, consumer goods companies, the post office
system, and real sector cooperatives.
1. Regulation Neutrality
Payments Banks would need to have the following characteristics to balance proportionate
regulation with competitive neutrality:
a. Given that their primary role is to provide payment services and deposit products to
small businesses and low-income households, they will be restricted to holding a
maximum balance of Rs. 50,000 per customer.
b. They will be required to meet the CRR requirements applicable to all the Scheduled
Commercial Banks.
c. They will be required to deposit the balance proceeds in approved SLR securities with
a duration of no more than three months and will not be permitted to assume any kind
of credit risks.
d. As in the case of a full service bank, it would be required to satisfy capital adequacy
requirements for both market risk and operations risk120.
e. In view of the fact that they will therefore have a near-zero risk of default, the
minimum entry capital requirement for them will be Rs. 50 crore compared to the Rs.
500 crore required for full-service SCBs.
f. They will be required to comply with all other RBI guidelines relevant for SCBs and will
be granted all the other rights and privileges that come with that licence.
g. Existing SCBs should be permitted to create a Payments Bank as a subsidiary121.
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Payments and Savings: Payments Bank
2. Competitive Concerns
There is also a concern regarding Payments Banks that are subsidiaries of mobile phone
companies, which could potentially face a conflict of interest while serving their partner
banks and operating as independent Payments Banks at the same time. In order to preempt these anti-competitive concerns, the Committee recommends that all mobile phone
companies must be mandated to provide USSD connectivity as per recent TRAI regulations
with the price cap of Rs 1.5 per 5 interactive sessions. In addition, they must be mandated
to categorise all SMSs related to banking and financial transactions as Priority SMS services
with reasonable rates and to be made available to the banking system.
3. Efficacy of Financial Inclusion
There is a concern that since customers need payments, savings, and credit services an
approach that offers these to clients separately will not end up serving them adequately.
No doubt customers require access to payments and credit on a convenient, continuous
basis. However, there is demonstrated customer preference for a combination of
differentiated channels to access payments and credit. A customer would often access
payments through a 24X7 ATM whether or not owned by her bank branch or via a credit
card POS terminal at a merchant location while for credit, they would be happy to go to
have their application evaluated at a more central location.
NBFCs, including MFIs and HFCs, have successfully demonstrated that with no access to
payments information, they have been able to build strong credit portfolios using a
number of credit risk proxies as well as soft information. There is also evidence that for
first time borrowers, information from mobile phone records and utility bill payments
provides very strong credit intelligence. Furthermore, it is true that when a customer
operates her payments account, she also generates information that would be useful for
credit decision making. However, it is not clear that bundling any one of these services
with credit is the best way to identify credit-worthy customers. The Committee feels that
the best way to do this would be to make sure that adequate complementary
infrastructure is created (as discussed in chapter 4.9) that the customer herself is able to
aggregate data from all these sources and authorise usage by designated providers who
assume credit risk on her, such as post-paid mobile phone accounts, utility providers, and
formal lenders.
Nothing in the design limits the ability of the customer or the full service Bank to build a
relationship on payments and lending. In fact, the current approach uniquely advantages a
full service bank to use its own private information on the customer‘s payment behaviour
in combination with information from credit bureaus, mobile phone records, and utility
bill payments to offer competitively priced products to high-quality customers. No other
provider brings this competitive advantage to the table. Even in the current landscape,
customers often will seek payment and deposit services from one provider while borrowing
from another provider. In any case, for equally important services such as life insurance,
the underlying provider is distinct from a full service bank. Banks have reached out to
providers with adjacencies such as retailers and mobile phone operators in order that they
may benefit from the lower marginal cost at which they may be able to offer payment
services to their customers. Finally, there is no compelling logic to suggest that customers
must be forced to seek payment services only from the specific provider that offers them
credit.
4. Viability of Payments Banks
There are concerns about the viability of the Payments Bank model but discussions of the
Committee with existing providers suggest that with adequate regulation, the market will
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Payments and Savings: Payments Bank
be extremely competitive with participation from big and small players alike 122,
particularly if neutral but proportionate regulation is applied to them.
Recommendations:
3.9
Given the difficulties being faced by PPIs and the underlying prudential concerns
associated with this model, the existing and new PPI applicants should instead be
required to apply for a Payments Bank licence or become Business Correspondents.
No additional PPI licences should be granted.
3.10
Under the Banking Regulation Act, a set of banks may be licensed which may be
referred to as Payments Banks with the following characteristics:
a. Given that their primary role is to provide payment services and deposit
products to small businesses and low-income households, they will be restricted
to holding a maximum balance of Rs. 50,000 per customer.
b. They will be required to meet the CRR requirements applicable to all the
Scheduled Commercial Banks.
c. They will be required to deposit the balance proceeds in approved SLR
securities with a duration of no more than three months and will not be
permitted to assume any kind of credit risks.
d. In view of the fact that they will therefore have a near-zero risk of default, the
minimum entry capital requirement for them will be Rs. 50 crore compared to
the Rs. 500 crore required for full-service SCBs.
e. They will be required to comply with all other RBI guidelines relevant for SCBs
and will be granted all the other rights and privileges that come with that
licence.
f. Existing SCBs should be permitted to create a Payments Bank as a subsidiary.
3.11
RBI to work with TRAI to ensure that all mobile phone companies, including those
with Payments Bank subsidiaries, be mandated to provide USSD connectivity as per
recent TRAI regulations with the price cap of Rs. 1.5 per 5 interactive sessions and
to categorise all SMSs related to banking and financial transactions as Priority SMS
services with reasonable rates and to be made available to the banking system.
78
Recommendations Regarding Payments and Savings
Chapter 3.7
Recommendations Regarding Payments and Savings
3.1
Every resident should be issued a Universal Electronic Bank Account (UEBA)
automatically at the time of receiving their Aadhaar number by a high quality,
national, full-service bank. An instruction to open the bank account should be
initiated by UIDAI upon the issuance of an Aadhaar number to an individual over
the age of 18. The bank would need to be designated by the customer from
amongst the list of banks that have indicated to UIDAI that they would be willing to
open such an account with the understanding that it would attract no account
opening fee but that the bank would be free to charge for all transactions,
including balance enquiry with the understanding that such transactions‘ charges
would provide the host banks with adequate compensation. The Bank would be
required to send the customer a letter communicating details of the account thus
opened. The Committee recommends that the RBI issue a circular indicating that
no bank can refuse to open an account for a customer who has adequate KYC which
specifically includes Aadhaar. [Identical to Recommendation 5.1]
3.2
RBI should require a strong Proof of Identity (POI) for each and every customer and
a documentary proof of one national address but waive the requirement of
documentary proof for the current address, for the purpose of opening a fullservice bank account. It should instead enjoin upon banks to carry out careful
tracking of usage and transactions patterns to ascertain the risk levels of the
customer and take necessary action based upon risk-based surveillance processes
developed internally by each bank. [Identical to Recommendation 5.2]
3.3
Under the existing rural branching mandate, a qualifying branch may be understood
to have specified features regarding minimum services available, minimum hours of
operation, nature of employment of staff, minimum infrastructure configuration,
nature of ownership of infrastructure and premises, and minimum customer
protection. In addition, this mandate is to be reviewed regularly and be phased out
once the goals specified in the vision statement for payments services and deposit
products have been achieved.
3.4
Aadhaar is the key piece of infrastructure to enable a customer to be identified
and authenticated so that repudiation and fraud risks are minimised and therefore
should become the universal basis for authentication. However, with slow
enrolment in some areas and low penetration of biometric devices and internet
network connectivity in many areas, intermediate authentication methods such as
PIN numbers and OTP could be used. State Governments need to coordinate more
closely with UIDAI, NPR, and BBNL to ensure rapid coverage of their states for both
Aadhaar and broadband.
3.5
Restore the permission of ND-NBFCs to act as BCs of a bank. Concerns around
commingling can be effectively handled through technology-based solutions such
that all settlements happen on an intra-day basis. In addition, eliminate the
distance criteria between the BC and the nearest branch of the sponsor bank.
Allow Banks to decide operational criteria.
3.6
The Taskforce on Aadhaar Enabled Unified Payment Infrastructure recommended
that State Governments pay a fee of 3.14 per cent (subject to a cap of Rs. 15.71
per transaction) for Direct Benefit Transfer (DBT) payments originating from
governments. RBI should enjoin upon State Governments to implement the same.
79
Recommendations Regarding Payments and Savings
3.7
In order to address contagion risk concerns, instead of requiring White Label ATMs
to access the settlement systems in a ―nested‖ manner through a sponsor bank,
provide them direct access to the settlement system subject to certain prudential
conditions, to mitigate operation risk.
3.8
In order to ensure that the BC infrastructure that is established is utilised in an
optimal manner and shared by multiple banks, which may each have account
holders in a specific geography, allow high-quality White Label BCs to emerge with
direct access to settlement systems subject to certain prudential conditions. This
would be similar to Recommendation 3.7 vis-à-vis mitigating operations risk in the
White Label ATM network.
3.9
Given the difficulties being faced by PPIs and the underlying prudential concerns
associated with this model, the existing and new PPI applicants should instead be
required to apply for a Payments Bank licence or become Business Correspondents.
No additional PPI licences should be granted.
3.10
Under the Banking Regulation Act, a set of banks may be licensed which may be
referred to as Payments Banks with the following characteristics:
a. Given that their primary role is to provide payment services and deposit
products to small businesses and low-income households, they will be restricted
to holding a maximum balance of Rs. 50,000 per customer.
b. They will be required to meet the CRR requirements applicable to all the
Scheduled Commercial Banks.
c. They will be required to deposit the balance proceeds in approved SLR
securities with a duration of no more than three months and will not be
permitted to assume any kind of credit risks.
d. In view of the fact that they will therefore have a near-zero risk of default, the
minimum entry capital requirement for them will be Rs. 50 crore compared to
the Rs. 500 crore required for full-service SCBs.
e. They will be required to comply with all other RBI guidelines relevant for SCBs
and will be granted all the other rights and privileges that come with that
licence.
f. Existing SCBs should be permitted to create a Payments Bank as a subsidiary.
3.11
RBI to work with TRAI to ensure that all mobile phone companies, including those
with Payments Bank subsidiaries, be mandated to provide USSD connectivity as per
recent TRAI regulations with the price cap of Rs. 1.5 per 5 interactive sessions and
to categorise all SMSs related to banking and financial transactions as Priority SMS
services with reasonable rates and to be made available to the banking system.
80
Section 4
Sufficient Access to Affordable, Formal Credit
Credit: Introduction and Strategic Direction
Chapter 4.1
Introduction and Strategic Direction
The vision statement for credit is:
By January 1, 2016, each low-income household and small-business would have ―convenient‖
access to formally regulated lenders that have the ability to assess and meet their credit needs,
and offer them a full-range of ―suitable‖ credit products, at an ―affordable‖ price.
If this vision is to be achieved, it will require a significant expansion in the quantum and
range of credit products to be provided by the banking sector. In this context, there are
some significant overall trends impacting the banking sector that are worth noting.
Risk Based Supervision Regimes as a Driver of Specialisation
These include the new Basel III guidelines and the RBI‘s new Risk Based Supervision (RBS)
framework which will be driven by periodic stress tests and an internal Supervisory
Program for Assessment of Risk and Capital (SPARC). In addition, there will be heightened
regulatory and supervisory scrutiny of Systemically Important Financial Institutions
(SIFIs)123. A number of market observers believe that these new developments, particularly
the imposition of Basel III, will result in more banks seeking to move away from ―purely
holding deposits and making its own loans‖124. Banks will need to manage their balance
sheets actively to ensure that they are using their capital resources efficiently in order to
preserve their Return on Equity. Even prior to the implementation of the Basel III Accord,
the Banking System, at under 13 per cent per annum showed a low and declining Return
on Equity125, and Stress Tests carried out by the Reserve Bank of India show that, ―…while
the present level of [NPA] provisions is adequate, a gap may arise under severe stress
scenario‖126. Increasingly, each bank will need to become inherently stronger, focus more
sharply on their core capabilities, and have the flexibility and the regulatory mandate to
collaborate actively with other market participants who have complementary capabilities
instead of being forced to follow identical strategies as every other participant. Policy and
regulatory action will need to facilitate this process in order to ensure that the vision is
achieved while simultaneously enhancing the stability of the financial system as a whole.
All of these will have a bearing on the strategies that Banks pursue for credit delivery.
Non-Performing Assets in the Banking System and Financial Inclusion
In India PSL guidelines require banks to allocate 40 per cent of their lending book to it,
making it the most important part of the bank‘s lending book and that has a significant
impact on the performance of the bank as a whole. However, whenever financial inclusion
goals are generally specified and strategies articulated, there is little acknowledgement of
risk and cost-to-serve considerations. Banks therefore approach this sector with a
complete lack of enthusiasm. Where they have a choice, they choose to under-serve this
segment, and where they do not, they end up bearing enormous losses. As one of the
direct consequences of this, government owned banks have ended up carrying a
disproportionate share of the burden of meeting the PSL obligations, particularly as it
concerns rural branching and serving the agricultural sector. This has had a severe impact
on their performance overall and, as will be discussed in the next chapter, despite the
loan waivers that took place a few years ago, more than half the total NPAs on their books
are attributable to this sector with an NPA ratio that is close to double that of the rest of
the asset book. While this would be a matter of serious concern for any bank, it is even
more so for these banks because, given their ownership, as group they represent a direct
contingent liability of the Government of India for their entire balance sheet and there is
a grave risk of a large systemic shock if there is a large build-up of non-performing assets
on their books.
83
Credit: Introduction and Strategic Direction
A larger expectation has gradually been created in the country that this entire business
has to be seen as a part of a series of hand-outs to low-income families, farmers, and
small-businesses and a viable business proposition is simply impossible to construct and
that rates of interest for providing an unsecured loan of Rs.25,000 to small farmers have
to necessarily be lower than the rates charged to secured home-loan borrowers of Rs.10
lakh. This is seriously hurting both the banking system as well as the client on whose
behalf it is being decided that a 10% rate of interest is a more important dimension than
access itself.
Even at the regulator level this approach has unfortunately led to a number of gaps in
both perception and implementation. For example, while for the much smaller NBFC-MFIs,
linkages with credit bureaus have been made mandatory, for the rest of the banking
system, particularly for the rural lending portfolio of banks, no such requirements have
been imposed; despite the skew in NPA ratios the standard asset provisioning norms for
PSL loans have been pegged at 0.25 per cent versus 0.40 per cent for the rest of the loan
book; and most damagingly, interest rates for small loans to farmers have been permitted
to be below the base rate when rates to large corporates with a far lower cost-to-serve,
are restricted to be at a minimum of base rates. On the other hand, save for some work on
the weather insurance side, risk management issues for these sectors have received no
attention at all. When Regional Banks have failed, poor governance is usually held
responsible and not also the fact that these banks were taking on concentrated risks that
they could not manage in times of crisis. Development of important risk management tools
such as commodity options, catastrophic portfolio insurance, and active warehouse receipt
trading is moving at a very slow pace. Unless these issues are integrated in discussions on
financial inclusion, banks will always be reluctant participants.
Given this important background, this Report overall and this section in particular, makes
a conscious effort to redress this balance and issues of risks and costs have been kept at
the very centre in the discussions of each of the strategies for providing better access to
financial services to small businesses and low-income households.
Potential for Differentiated Banks in Deepening Credit Delivery
The RBI Discussion Paper on Banking Structure in India discusses the need for
differentiated banks as a way to increase the size and strength of the banking sector
relative to the needs of the real economy. In terms of new banks, the minimum capital
requirements to license a National Bank which can perform both retail deposit taking and
lending would need to be kept very high, with the result that only very few new entrants
would qualify. However, for differentiated banks such as Wholesale Consumer Banks and
Wholesale Investment Banks who are permitted to accept only wholesale deposits, these
requirements could potentially be significantly lowered, thus permitting many more new
entrants.
While National Banks is the dominant design and will remain one, it is clear that there is a
need to proceed with extreme caution in creating new ones. Wholesale Consumer and
Wholesale Investment Banks can significantly add strengths to the task of financial
deepening without the risks of creating several new retail deposit-taking National Banks.
Wholesale Consumer Banks are well placed to build deep specialisations in categories such
as small business loans, student loans, and commercial vehicle finance, while Wholesale
Investment Banks can effectively channel market liquidity as well as make it possible for
an active market to emerge in the trading of such loans.
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Credit: Introduction and Strategic Direction
Role of Non-Banking Financial Companies and their Potential Transition to Banks
In addition to Banks – existing and new, there is also a continuing role for Non-Banking
Financial Companies (NBFCs). The bulk of the NBFC sector in India remains very small,
does not have the ability to garner public deposits, and in aggregate has performed at a
very high level of quality. The sector as a whole therefore does not constitute a source of
systemic instability. It has instead been playing the role of extending the reach of the
banking system to the more difficult parts of the economy. While NBFCs in their current
format play a useful role in credit delivery and must continue to do so with active
regulatory support, they will have limits to how large they can become. This will be the
case on account of differentiated capital adequacy requirements, absence of access to
payment systems, constraints imposed by dual regulation, and other restrictions on the
nature of business they are allowed to undertake and the nature of risks they are allowed
to assume. From a systems design perspective this would be required because as players
outside the banking system they would not enjoy the same degree of protection as banks
would, and nor would the three principles of Stability, Transparency, and Neutrality apply
to them in the same degree. The differentiated banking design offers multiple end points
towards which NBFCs could head, particularly if issues such as SLR requirements, uniform
applicability of CRR requirements and the current definition of PSL which is rooted in
historical perspectives, are satisfactorily dealt with.
The table below provides an illustration of how various norms may be harmonised in a
differentiated bank regime that also provides room for NBFCs.
Entry Capital
Requirement
Branch
Restrictions
Minimum Tier I
Capital Adequacy
Retail Deposits
Total Capital
Adequacy
Lender of Last
Resort
Payments System
Access
CRR
SLR
Table 4.1.1
Harmonisation of norms
National Bank
Wholesale
Consumer/Investment
Bank
Rs. 500 crore
Rs. 50 crore
NBFC
Rs. 2 – 5 crore
No rural branch
requirement if
fewer than 20
branches
4.5%
No rural branch
requirement if fewer
than 20 branches
Not Applicable
4.5%
12%
Yes
No
9%
9%
No, with the
exception that
NBFC-D‘s are
permitted Time
Deposits
15%
Yes
Yes
No
Yes
Yes
No
Yes.
Should eventually
be applicable
only on demand
deposits
Yes.
Eventual Removal
Yes.
Should eventually be
applicable only on
demand deposits
No
Yes.
Eventual Removal
Yes for NBFC-D.
Eventual Removal
85
Credit: Introduction and Strategic Direction
PSL
Risk Weights
SARFAESI
Duration to
qualify for NPA
Definition for
sub-standard
asset
Definition for
doubtful assets
Quantum of
provisioning for
Standard Assets
Deposit Insurance
Capital against
market and
operations risk
Yes.
Transition to a
more dynamic
framework
Differential
Yes.
Transition to a more
dynamic framework
No
Differential
Yes
Yes
Risk-based
approaches to be
followed
Risk-based
approaches to be
followed
Risk-based
approaches to be
followed
Risk-based
approaches to be
followed
Yes
Yes
Risk-based approaches
to be followed
100% for all
assets
Yes, with strong
customer
protection
guidelines
Risk-based
approaches to be
followed
Risk-based
approaches to be
followed
Risk-based
approaches to be
followed
Risk-based
approaches to be
followed
No
No
Risk-based approaches
to be followed
Risk-based approaches
to be followed
Risk-based approaches
to be followed
Yes
Yes
The rest of the section discusses issues in credit delivery relevant to various banking
designs. The two banking designs that are relevant for the provision of credit in the Indian
context are given below. Each of these design choices and their variants have been
described in some detail in Chapter 2.4:
1. National Banks operating as: Branch-based lenders; or working through Agents;
Wholesale Banks; Consumer Banks using credit scores and analytics.
2. Regional Banks operating through their branches.
Although not a banking design, issues around NBFCs are also examined in detail given their
relevance to credit delivery.
Within each of these designs, the following chapters examine their performance and
potential generally and specifically in terms of: a) small loans to low-income households
for various life-cycle needs; and b) lending to small businesses.
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Credit: National Bank with Branches
Chapter 4.2
National Bank with Branches
This is a design that covers large scheduled commercial banks that operate on a nationwide or supra-regional basis using traditional branch banking.
This has been the dominant model of Indian banking for several decades. In aggregate,
there are 105,753 branches across all scheduled commercial banks in India127. Of these,
about 39,336 branches are in rural India. Nearly 10,000 rural bank branches have been
added in the last three years (2010-2013) alone – a fourth of the total number of rural
branches. While this branch network is inadequate relative to the vision of one credit
access point for every 10,000 population, even this level of penetration has been achieved
as a result of single-minded regulatory and policy focus. For instance, Banks are required
to maintain 25 per cent of their branch network in rural India.
In the context of rural credit to low-income households, this bank branch network has
been focussed on advancing loans to farmers through the Kisan Credit Card (KCC) and the
General Credit Card (GCC) products and advances to non-farming households through the
Self-Help Group (SHG) product. KCCs advanced through bank branches account for the
largest share of credit activity under financial inclusion with a portfolio outstanding of
over Rs. 2.62 lakh crore as on March 31, 2013.
Table 4.2.1
Credit Outstanding for Rural Credit Products
Amount outstanding for various rural
Mar-11
Mar-12
credit products (in Rs. crore)
General Credit Card (GCC)
Self-Help Group loans (SHG)
Kisan Credit Card (KCC)
Mar – 13
3,500
4,200
7,700
30,000
36,000
39,375
160,000
206,800
262,200
Despite this sustained effort to improve credit delivery through bank branches, rural
outreach indicators remain poor in absolute terms with significant regional and segmental
inequities. In 2002, non-institutional agencies accounted for 42.9 per cent of rural
credit128. A study showed that an increasingly large share of agricultural credit is going to
farm sizes of more than 5 acres129. As Chapter 2.2 points out, there is also significant
regional skew in financial depth. During 2007-2012, 37.55 per cent of agricultural credit
was accounted for by the Southern states despite them constituting less than 20 per cent
of India‘s Gross Cropped Area while the Eastern and North-Eastern states accounted for
only 7.71 per cent, despite having comparable Gross Cropped Area130.
Region
Northern
Table 4.2.2
Regional Disparities in Agricultural Credit
Agricultural Credit During
Share in Gross
11th Five Year Plan (%)
Cropped Area (%)
27.44
20.11
North-eastern
0.44
2.83
Eastern
7.27
14.66
Central
13.20
27.26
Western
14.1
16.47
Southern
37.55
18.68
All India
100.00
100.00
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Credit: National Bank with Branches
Under the SHG-Bank linkage program, as on March 2012, 43.5 lakh SHGs were provided
with bank loans through the commercial banks, cooperative banks and RRBs, of which 54
per cent belonged to the Southern region. With an average amount of Rs.144,086
disbursed as loan per group, the total outstanding amount to SHGs stood at Rs.36,341
crore as on March 2012. NABARD refinance of Rs.3,073 crore was provided to banks
covering their lending to SHGs in the same year, amounting to 19.9 per cent of NABARD‘s
long-term refinance disbursements131. The NPAs of banks against loans to SHGs stood at
6.38 per cent as on March 2012132.
Similarly for SMEs, the Economic Census of 2005-06 revealed that 90 per cent of
enterprises are self-financed. Of the balance 10 per cent, Banks account for 3.25 per cent
of funding. An estimate done for Bangalore Urban District which has an overall credit to
GDP ratio greater than 100 per cent and ranked among the top ten financial inclusion
districts by CRISIL Inclusix, revealed a presence of five lakh SMEs with a projected credit
need of Rs. 17,000 crore. Against this, the total lending across all segments by all
commercial banks is approximately Rs. 12,000 crore133.
As far as risk and quality of this credit is concerned, Public Sector Banks are the largest
participants in priority sector lending, accounting for more than 75 per cent of the over
Rs.15 lakh crore of the total. The Gross Priority Sector NPA ratios for these Banks are
about 50 per cent higher than their overall Gross NPA Ratios, with small loans (below
Rs.25,000) having a ratio that is 4.5 times higher134. As seen in Table 4.2.4135 below, for
private sector banks and public sector banks, non-performing loans are far higher in the
priority sector than in the non-priority sector.
Year
Overall
2009-10
2010-11
2011-12
3.2%
3.6%
4.3%
Table 4.2.4
PSL NPAs
Priority Sector
Agriculture
MSE
2.2%
3.3%
4.3%
3.7%
3.4%
3.9%
Non-priority sector
GNPA
Adjusted
GNPA136
1.6%
2.1%
1.4%
1.9%
1.9%
2.6%
On the cost front the picture is equally grim for both Private Sector and Public Sector
Banks with the cost of operations (not including interest cost) alone approximating 30 per
cent to make a one year loan of Rs.10,000137. For a Private Bank the cost of an ultra-small
brick and mortar branch (USB) is estimated to require an investment of Rs.8-10 lakh and
an annual recurring cost of Rs.20 lakh138 - this high a level of expenditure may not be
consistent with the level of business activity that this USB will be able to sustain.
While there may be notable exceptions from the above analysis it is very clear that the
current branch-based approach is not an effective credit delivery channel. As a rule very
high-cost and very high-risk strategies are being pursued by the National Banks in the
context of financial deepening. If National Banks wish to act as originators of credit risk
using their branches, they will have to develop far more effective, lower cost, and far
lower-risk models of outreach.
How can the efficacy of branch-based lending for National Banks be increased? While the
empirical evidence using data even from developed nations suggests that large banks are
disadvantaged in lending to low-income households and small-businesses139, a number of
banks within India, as well as globally, have found ways of doing this by placing dedicated
staff inside their branches with the full power to make local decisions and by effectively
treating branches focussed on this business as stand-alone profit centres and carefully
measuring their performance using Risk Adjusted Return On Capital (RAROC) type
integrated performance measures. Banks in India have centralised loan processing
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Credit: National Bank with Branches
―factories‖ and rely on the separation of sales, credit, and collections to ensure focus and
high-quality in their consumer finance operations. However, the lessons from successful
examples of branch-based lending appear to suggest the opposite direction. Banks would
have to de-centralise loan decision making and integrate sales, credit, and collections.
Some of the notable examples are given below and all carry the message that if this design
has to work, decision making needs to be moved very close to the customer so that ―soft
information‖ can be acted upon.
1. Bank Rakyat Indonesia is the oldest bank in Indonesia and has created a separate
structure for its micro-banking business which is addressing its objectives of financial
inclusion and penetrating into the mass market segment very well. This is done by
creating a structure of small dedicated units (referred to as a BRI Unit) under a Branch
office which caters to its mass micro business activities. The BRI unit is a small micro
Branch structure established in interior places with a small compact staff team
comprising 3 staff members (1 Account officer, 1 teller for Cash transactions, and 1
customer service executive for non-cash transactions). Under each BRI unit, there are
separate ―Teras BRI‖ units in the style of extension counters to expand the reach of
the BRI units where warranted and ―Teras mobile‖ units which travel to the villages for
carrying out banking activities. This dedicated micro banking vertical is 100 per cent
self-funded i.e., the savings/deposits from micro banking clients fund the loans to the
micro banking clients. All loans below USD 10,000 are handled by micro banking
branches and thus there is no overlap in customer base between different verticals of
the bank. Each branch is a profit centre with a defined break-even period and
incentive structure is linked to the performance of the branch140. High interest rates
on loans has been noted as a concern with the BRI model.
2. Lloyds Banking Group is one of the large banks in the UK which has placed dedicated
relationship managers in 500 of its locations. They specialise in certain sectors such as
agriculture, franchising, property, healthcare, legal, and manufacturing. They can
decide on loans of up to GBP 500,000 and cover 90 per cent of lending applications at
Lloyds141.
3. A Large US Bank: This bank (which is amongst the top five commercial banks in the US)
operates more than 1500 branches and uses standardised credit scoring methodology
to assess its small business loans. However, ―… credit decisions ultimately reside with
branches because local managers can alter credit scores on the basis of a standard set
of subjective criteria [based on non-verifiable ―soft‖ information that the branch
manager has] that the final score reflects [through this process ―hardening‖ their
―soft‖ information]. Similarly, they can adapt loan terms including pricing to the
specific circumstances of the application. However, branch managers‘ career
prospects and remuneration depend on the overall success of their credit decisions,
and local overrides are closely monitored by the bank‘s risk management‖. Using this
approach the bank has been able to successfully build a client base that is low risk but
pays a higher margin on account of the banks‘ proximity to them142.
4. HDFC Bank: They have over 1,000 branches in rural and semi-urban areas and a
dedicated field force of 3,500 to serve these markets using products such as Self-Help
Group loans and Joint Liability Group loans. As of this date, they have disbursed Rs.
1,600 crore during the current financial year, at lending rates ranging from 21 – 26 per
cent and have reached out to over 23 lakh unique rural borrowers spread across 24
states. This dedicated field force is another example of a ―bank-in-a-bank‖ model
which, while using a shared branch infrastructure, is managed as an entirely separate
unit within the bank. In terms of products, the loan product is combined with a
recurring deposit product and a savings account. There has been a reasonable build-up
of balances in these recurring deposit accounts. HDFC Bank expects this dedicated unit
89
Credit: National Bank with Branches
to form the foundation of its financial inclusion efforts and over a five year period,
build a commercially sustainable business. The key success drivers of this business
appear to be the ability to hire local staff, maintain a low-cost structure, and control
operational and credit risks in a tight manner.
It is clear that there are ways in which large branch based models can be made more
effective in the context of credit delivery to low-income households and small-businesses.
However, this goes well beyond the mere physical presence of a branch. Executing this
strategy is going to be challenging given all the human resources and other challenges that
are likely to be faced by banks in the process. Several aspects of the functioning of the
Bank will have to change.
Banks will also have to develop strong risk management capability and the power to use
various tools to manage their exposures to these segments. These include:
a. Systematic Risk: Irrespective of how origination exactly happens, it is entirely possible
that National Banks may end up building portfolio concentrations (to a particular
sector or region) that are unhealthy and attract a higher level of penalty in their Stress
Tests than they have comfort with. They will need to continually and actively
rebalance their portfolio using sales and purchases of loans, bonds, securitised
portfolios, and credit derivatives. They will need to move away from an exclusive
originate-and-hold-to-maturity strategy and among other things, will need the ability
to be able to hold bonds in their banking book without having to mark them to market
and will gradually need to start to document all their loans using debenture / bond
documentation so that the liquidity of their balance sheet improves.
b. Rainfall Risk: In rural and agricultural lending, rainfall is the most important source of
exogenous risks. Banks have thus far tried to get their clients to hedge this risk using
crop insurance that is bundled along with a farm loan. Unfortunately however, the
entire rural book is exposed to this risk even in the non-farm portion of it and the most
efficient way for banks to hedge this risk is to seek to protect the entire book against
these shocks. Such a strategy also allows the bank to carry out large scale waivers in
case of a region-wide or a nation-wide shock to rainfall without having to request for
government funded bail-outs which have created a serious distortion in the farm level
credit culture.
c. Commodity Price Risk: Commodity price risk is the other big risk that needs to be
hedged using either insurance or commodity put options that the bank purchases on a
wholesale basis in global options markets. These are not available in India. These could
also be used to offer large scale loan-waivers in case of extremely negative price
events.
d. Moral Hazard: Since there is no uniform reporting of credit data mandated for all
National Bank branches, there are weak controls against moral hazard. Universal
reporting to credit bureaus of all loans, both individual and SME, but in particular SHG
loans, Kisan Credit Card, and General Credit Card is important to mitigate this risk.
Irrespective of how well National Banks execute their origination and their balance sheet
management strategies, given their systemic importance and the need to ensure that any
signs of incipient weakness are quickly identified and dealt with, it is very important to
ensure that there is complete transparency and accuracy in the financial statements of
these financial institutions, including weaknesses stemming from priority sector lending.
Such transparency also ensures that the competition between different types of
institutions is on a level playing field and that the apparently stronger player is indeed
inherently stronger and not simply being ―protected‖ by its lower levels of disclosure. In
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Credit: National Bank with Branches
order to ensure complete transparency and accuracy in the financial statements of these
institutions, several steps would need to be taken:
1. While NPA recognition norms in India are comparable to those currently prevailing in
most countries, Indian NPA coverage ratios are far lower. Comparison with developing
countries such as China, Brazil, and Mexico, who are likely to have comparable levels
of risk and Loss Given Default statistics, reveals that India has both lower provisioning
and higher observed NPAs143. However, this approach to NPA recognition assumes that
all banks follow similar strategies and have the same asset mix. In view of the fact that
banks may choose to focus their strategies on different customer segments and asset
classes, it is recommended that the regulator provide specific guidance on provisioning
norms at the level of each asset class.
For instance, given the fact that historical NPAs on Micro Finance Joint Liability Group
(JLG) loans are in the region of 0.7 per cent144 and assuming loss given defaults to be
100 per cent, the risk based estimate of the NPA Coverage Ratio for this asset class
would be 100 per cent of historical NPAs or 0.7 per cent. For KCC, currently banks
formulate their own internal policies in terms of fixing the repayment period and
determining the scale of finance. RBI may require banks to formulate broad guidelines
so that there is some degree of standardisation in the way the KCC product is
administered and it becomes possible to properly ascertain if the asset is performing
as expected or not. The guidelines should prescribe various factors which banks should
consider before fixing repayment period and scale of finance. The repayment period
should be linked to the income generation pattern of farmers which in turn depends on
numerous factors including cropping pattern, cropping season (Kharif and Rabi),
harvesting season (short duration or long duration), acreage, yield, and economies of
scale. For instance, a 9-12 month repayment period may be fixed for short duration
crops (rice, wheat or pulses) whereas a longer repayment period of one year may be
fixed for long-duration crops like sugarcane or banana. Tracking of actual repayments
against these periods on a 90 past-due basis can then be used to carry out asset
classification. And, over the over the last decade, since the gross NPAs in the
agriculture segment have been higher than banks loans to the non-agriculture segment
on an average by 1.21 times, the standard asset provisioning, for all agriculture
exposures including KCC should be set at 0.5 per cent (~1.21 times of 0.4 per cent)145.
Similarly, based on the data available for different asset classes, the regulator should
recommend NPA Coverage Ratios for each of them. A bank‘s overall NPA Coverage
Ratio would be a function of its portfolio asset mix.
2. Even on standard assets, provisioning levels would need to reflect the underlying level
of riskiness of each asset class (combination of customer segment, product design, and
collateral). For example, for a bank pursuing a broader priority sector strategy, a longterm analysis of priority sector asset quality indicates that there needs to be an
increase in standard assets provisioning from the current level of 0.25 per cent to the
level of 0.40 per cent.
3. Different customer-asset combinations behave very differently from each other and
mechanical rules (such as a 90 day past-due rule) applied at the level of each loan may
not accurately capture the riskiness of each sub-group. It is recommended that the
regulator mandate NPA recognition rules at the level of each asset-class and require
that all banks conform to these mandates. For instance, a 52-week, weekly repayment
JLG loan to a low-income household and a 15-year, monthly repayment mortgage to a
high-income household are fundamentally different type of customer-asset sub-groups
that require differential NPA recognition treatment. In view of these differences, the
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Credit: National Bank with Branches
regulator might specify that the NPA recognition norm for the weekly JLG loan be 30
days, while that for the mortgage be 120 days.
4. Require all financial institutions to publicly disclose the results of their stress tests
both at an overall balance sheet level as well as at a segmental level on an annual
basis.
For a variety of reasons governments may decide to offer interest subventions to farmers
and on occasion loan waivers as well. It is strongly recommended that such subventions
and waivers be offered directly to beneficiaries by the governments using DBT into their
bank accounts and allow banks and financial institutions to act strictly according to
market principles so as not to introduce strong moral hazard and make it difficult for
financial institutions to enforce contracts. This is the standard manner in which such
subsidies are offered in the EU146 and the US147 to ensure that there are minimal distortions
in the market prices and production decisions of farmers while providing them some
minimum income protection.
Banks are also required to price farm loans below Rs. 3,00,000 at 7 per cent for which
they receive an interest subvention of 2 per cent in the consequent period. This pricing
does not appear consistent with the risk parameters discussed previously. From the
perspective of Stability that entails sustainable pricing, Banks must be allowed to freely
price these loans based on their risk models. The current permissions to price below their
base rate must be withdrawn.
Recommendations:
4.1
In order to encourage banks to actively manage their exposures to various sectors,
including priority sectors, a number of steps would have to be taken:
a. Banks must be required to disclose their concentration levels to each segment
in their financial statements.
b. Credit facilities documented as bonds or Pass-Through Certificates (PTC),
whether originated directly or purchased in the secondary markets should be
permitted to be held in the ―banking book‖ of a bank based on declared intent
and not merely based on source or legal documentation. [Identical to
Recommendations 4.10 and 4.30]
c. RBI must represent to the MoF to restore the tax-free status of securitisation
SPVs as pass-through vehicles for tax treatment pointing out the role it would
play in ensuring efficient risk transmission. [Identical to Recommendations 4.11
and 4.38]
d. Banks must be permitted to purchase portfolio level protection against all
forms of rainfall and commodity price risks, including through the use of
financial futures and options bought either within India or globally.
4.2
Universal reporting to credit bureaus should be mandated for all loans, both
individual and SME, but in particular SHG loans, Kisan Credit Card, and General
Credit Card. [Identical to Recommendation 4.43]
4.3
In view of the fact that banks may choose to focus their priority sector strategies
on different customer segments and asset classes, it is recommended that the
regulator provide specific guidance on differential provisioning norms at the level
of each asset class. A bank‘s overall NPA Coverage Ratio would therefore be a
function of its overall portfolio asset mix. On standard assets, provisioning levels as
well as asset classification guidelines specified by RBI would need to reflect the
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Credit: National Bank with Branches
underlying level of riskiness of each asset class (combination of customer segment,
product design, and collateral) and not be uniform across all the asset classes.
Additionally, different customer-asset combinations behave very differently from
each other and it is recommended that the regulator mandate NPA recognition
rules at the level of each asset-class and require that all banks conform to these
mandates. [Identical to Recommendation 4.21 for NBFCs]
4.4
All banks should be required to publicly disclose the results of their stress tests
both at an overall balance sheet level as well as at a segmental level at least
annually. [Identical to Recommendation 4.22 for NBFCs]
4.5
From the perspective of Stability that entails sustainable pricing, banks must be
required to freely price farm loans based on their risk models and any subventions
and waivers deemed necessary by the government should be transferred directly to
the farmers and not through interest subsidies or loan waivers. The permission to
price farm loans below the base rate should be withdrawn. [Also see
Recommendation 4.34]
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Credit: National Bank with Agents
Chapter 4.3
National Bank with Agents
This design refers to Banks that have a limited branch network but rely on sourcing credit
through agents. It is one of the ways of reducing costs, improving outreach, improving
Suitability, and simultaneously reducing risks associated with lending.
Agents with no Capital Commitment
Indian banks have thus far used two types of agents to carry out their lending activities –
the Direct Sales Agent (DSA) and the Business Correspondent / Business Facilitator
(BC/BF). The BC/BF can either be a corporate or an individual. A corporate BC/BF can
either be a dedicated entity or an existing real-sector intermediary such a sugarcane
company that has farmer relationships. The BC/BF currently accounts for a small share of
priority sector lending, approximately Rs. 2,500 crore of KCC and GCC loans are
outstanding through these channels. Not much is known about the quality of these loans.
It is clear from global experiences in consumer credit148 that credit-score based lending
with no capital commitment by the Agent (in this case the BC/BF) is prone to significant
adverse selection and moral hazard. The urban DSA model for short-term personal loans
and credit cards attracted significant negative attention on account of customer
protection concerns and had to be discontinued by all the National Banks.
Agents with Capital Commitment
In the rural context, ICICI Bank in 2005-06 successfully experimented with the concept of a
Credit Franchisee who was similar to a Business Correspondent / Business Facilitator but
was required to place a fixed deposit with the Bank of 10 per cent of the amounts of loans
that he would sanction. Upon default, the deposit would function as a First Loss Deficiency
Guarantee149.
Globally, many banks have used agents to effectively increase penetration and reach. The
factor crucial to the success of this model is the careful selection of agents. For example,
shop keepers who are successful in their core business, enjoy the trust of the community,
have a large cash inflow in their business and are already familiar with providing credit to
the customers for their purchases, were chosen to be agents by an Indonesian bank. These
selection criteria ensured that the shop keeper had the requisite skill and understanding
to connect with the customers and also see the banking opportunity to do effective cash
management for him. His cash inflows are used for customer withdrawals / loan
disbursements / remittances and he gets paid for that, as also for getting additional
footfall. In the Philippines, pawn shops have been used as agents by banks as they already
have a natural interest and connect with the customers150.
Dedicated Subsidiaries as Agents
For National Banks, fully owned subsidiaries can also potentially act as dedicated agents of
a National Bank subject to the guidelines on investments in subsidiaries151. They can be a
cost effective alternative which can address some of the challenges around having wage
flexibility, different compensation structures, local hiring practices, contractual
arrangements / outsourcing, etc. Also, a subsidiary route enables a focussed approach to
economise on the cost of lending operations. This route will also be able to connect with
the local community better and thus enable better quality of assets. For example, in the
case of Bank Danamon in Indonesia, the vehicle finance and equipment finance business is
conducted through Adira Finance, a fully owned subsidiary that sells the loans that it
originates to Bank Danamon through an arm‘s length arrangement for funding purposes. In
India, HDFC Limited has promoted a company focussed on education loans called Credila.
The motivation of these banks to set-up a subsidiary has been to get the right focus and
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Credit: National Bank with Agents
appropriate cost structure for the specialised business and also attract other experts as
investor partners in the company.
In the Indian context, however, while considering the concept of a subsidiary route, the
case of Regional Rural Banks (RRBs) needs to be kept in view, which were also started by
Public Sector Banks on this premise but subsequently their salary structure had to be made
at par with public sector banks. So the very purpose of setting up the RRBs as low cost
structures could not be served. Permitting strong National Banks to float specialised
subsidiaries with an ownership structure that can address this concern may allow them to
benefit from the inherent strengths of these institutions.
Real Sector Intermediaries as Agents
Real sector intermediaries such as sugarcane companies are used by Banks, particularly
Private Sector Banks with limited branch networks, as agents. While this may work as an
interim solution for outreach, given that credit sourcing and servicing are peripheral
activities for these agents, it is unlikely that these agents will be able to provide the full
range of credit products as defined in the credit vision statement. There also appear to be
greater customer protection concerns here given the ability of the agent to tie credit in
with its procurement activities and offer lower procurement prices to the farmer. Agents
must create dedicated operations for lending so that there is separation of credit and noncredit activities.
Outsourcing Guidelines
It is clear that there are ways in which Agent based models can be made to work for
providing comprehensive financial services to low-income households and smallbusinesses. However, while this strategy has the potential to address the costs of
intermediation, it has significant risks vis-à-vis customer protection in the case of
individual Agents and credit risk in the case of Agents who commit no capital to the
lending business. As a consequence all of the safeguards specified earlier for National
Banks with Branches would need to be adhered to here as well. Given the inherent moral
hazard entailed in agent-based lending models, risk-sharing between the Bank and its
agents is an important enabler to consider. Current RBI outsourcing guidelines do not
permit outsourcing of credit sanctions of loans (including retail loans) by Banks152. This will
need to be suitably amended so that Agents can sanction loans on behalf of Banks where
risk is then managed through risk-sharing arrangements and statistical quality control
processes.
Recommendations:
4.6
Banks are already permitted to set up specialised subsidiaries upon getting specific
approvals from the RBI. However, no approvals have been granted; potentially due
to concerns around circumvention of branch licensing guidelines. In light of the
recent relaxation of branch licensing guidelines and the capability to carry out
consolidated supervision, the requirement of prior approvals may be removed for
the purpose of creating dedicated subsidiaries for financial inclusion.
4.7
The decision on the manner in which risk sharing and credit approval arrangements
need to be structured between banks and their agents can be left to the judgment
of banks. Outsourcing guidelines should be amended to permit this.
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Credit: National Consumer Bank
Chapter 4.4
National Consumer Bank
These banks lend directly to certain consumer segments using credit scores153 and other
analytical models, either through agents or product-market partnerships with entities such
as department stores, vehicle manufacturers, mobile phone companies, and utility
services providers.
At the heart of the branch and agent-based models is the assumption that proximity
matters. While ―soft information‖ and the associated need for proximity would continue
to be important for many segments of customers, advances around ―big data‖ that
promise to deliver a far more accurate picture of the credit-worthiness of the individual
and business than traditional branch-based under-writing or credit scores could completely
transform the nature of credit decision making in the years to come. Even currently these
new approaches seem particularly well-suited to specialised segments such as student
loans and early stage financing for small businesses. Globally, while concerns have been
expressed about the over-reliance on credit scores for credit-decision making, particularly
in the context of the US subprime-mortgage crisis154, longer-term trends, such as those
documented for the first time by Petersen and Rajan (2002)155, suggest that the distance
between lenders and small business borrowers is growing and that they are communicating
less and less with each other. They find that the principal factor accounting for this is the
fact that technology of information gathering, aggregation, and reporting has improved
dramatically and allows firms to address the traditional problems of adverse selection and
moral hazard in a completely different manner.
Even in India such approaches have been found to be successful by the Credit Card
industry – they permitted banks such as Citibank156 which had very few branches to
become one of the largest credit card issuers and ICICI Bank to reach a leadership position
in mortgages. In the priority sector lending space, NBFCs have successfully used such
approaches combined with some ―soft‖ information to build large equipment and vehicle
finance businesses. In the microfinance industry which deals with the poorest of clients,
credit bureau records have become near universal. According to data from MFIN, in about
18 months' time, credit bureaus have been able to gather information about 10 crore loan
accounts of about 2.5 crore individual customers from about 42 MFIs.157
These are very welcome trends and better ability to store, analyse, and share data
collected by financial institutions, mobile phone companies, and electricity utilities would
allow high quality borrowers located even in remote rural locations to signal to low cost
lenders such as a National Consumer Bank, their credit worthiness can go a long way
towards ensuring that sufficient access to adequate levels of credit is made available to
them at low prices. For several National Banks, this may even be a better strategy to grow
their client and asset base rather than through a branch network as discussed previously.
The value of real-sector companies like utilities and mobile phone companies may also be
in the context of their information assets and not just their outreach.
In its chapter on Protection of Personal Information of Consumers158, the draft Indian
Financial Code recommends that the regulator may make regulations to:
a. Provide additional requirements for the collection, storage, modification and
protection of personal information by financial services providers, including:
i. The manner of maintenance of records of personal information and the timeperiods for which the records are to be maintained; and
ii. The manner in which records of personal information should be dealt with after
the expiry of the specified period;
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b. Exempt a class of financial services providers from the application of all or any portion
of this Chapter or modify the manner in, or extent to which, all or any portion of the
Chapter applies to them, subject to any specified conditions; or
c. Establish mechanisms to ensure that consumers have access to, and are given an
effective opportunity to seek modifications to, their personal information.
Recommendations:
4.8
There is a need to develop a robust legal and regulatory framework around
customer data generated in various transactions (credit and payments, digital and
off-line), with the objective of customer ownership of their own transactions data
and its use, among others, for signalling credit-worthiness. RBI should constitute a
Working Group comprising TRAI, CERC, and Credit Information Companies to
develop a framework for sharing of data between telecom companies, electrical
utilities, and credit bureaus. This framework should be in keeping with the FSLRC‘s
draft Indian Financial Code which recommends the creation of regulations on the
collection, storage, modification and protection of personal information by
financial services providers; and establishment of mechanisms to ensure that
consumers have access to, and are given an effective opportunity to seek
modifications to, their personal information. [Identical to Recommendation 4.42]
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Credit: National Wholesale Bank
Chapter 4.5
National Wholesale Bank
Some National Banks without the branch network or expertise of the underlying priority
sector asset classes, have sought to fulfil their priority sector obligations by purchasing
these assets from other banks and financial institutions, while continuing to remain
wholesale in character. The strategy of international banks in India and some of the midsized private sector banks have been along these lines.
The RBI guidelines on securitisation have provided a strong framework for the
development of this market. The performance of securitised priority sector assets has
been quite robust. As an illustration, 89 per cent of securitised micro-loans rated by CRISIL
were rated ‗A‘ and above.
Given the enormous cost and informational disadvantages that National Banks face in India
it is possible that this may be an entirely acceptable and even a preferred strategy for a
large, systemically important bank to follow, relative to all the others that have been
discussed thus far, so that it is able to maintain an extremely high level of safety in its
credit ratings and can therefore act as a high quality aggregator of both deposits and loans
allowing smaller and more specialised banks and financial institutions to transfer their own
systematic exposures to such a Wholesale Bank.
In order to make several markets such as those relating to credit derivatives, corporate
bonds, warehouse receipts, and take-out financing function well, the presence of such
Wholesale Banks as aggregators and market makers is essential. The presence of such
banks can have an important and beneficial impact on financial inclusion.
In order for a National Bank to successfully follow the strategy of a Wholesale Bank and
act as an aggregator and market maker, significant regulatory anomalies need to be
addressed:
1. Removing price caps on priority sector assets originated indirectly. Current PSL
guidelines state that ―investments by banks in securitised assets, representing loans to
various categories of priority sector, except 'others' category, are eligible for
classification under respective categories of priority sector (direct or indirect)
depending on the underlying assets provided….the all-inclusive interest charged to the
ultimate borrower by the originating entity should not exceed the Base Rate of the
investing bank plus 8 per cent per annum‖159. Since there are no such price caps when
the Bank originates a loan directly, this regulation appears to violate the principle of
Neutrality.
2. Securitisation markets had been growing steadily in India since around 2005 owing to a
strong and conducive regulatory environment. Securitised debt instruments were listed
for the first time in 2013, thus improving standards of transparency and reporting and
widening the potential investor base. However, post facto claims by income tax
authorities in October 2011, stating that the gross income of such SPVs was liable to
tax, have effectively hampered the growth of the market. The matter is presently subjudice at the Bombay High Court. The Finance Bill, 2013, has sought to clarify the tax
position by stating that a securitisation SPV is not liable to pay income tax. However,
the Bill also states that trustees of such SPVs must pay tax on distributed income
calling into doubt the pass-through status of these vehicles. Restoring the pass-through
status of securitisation SPVs will help to develop this market and therefore, create
pathways for Wholesale Banks to provide liquidity to other Banks and Financial
Institutions directly originating assets in priority sectors160.
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Credit: National Wholesale Bank
3. Addressing the loan-bond arbitrage in terms of opacity of the former by allowing banks
to classify (and reclassify) bonds into a held-to-maturity (HTM) or available-for-sale
(AFS) bucket based on their declared intention rather than automatically based on
legal documentation.
4. This design would be vastly enabled if the role of apex agencies such as NABARD,
CGTMSE, SIDBI, and NHB are aligned towards the provision of risk-based credit
enhancements, market-making and facilitation of listing of debt securities rather than
provision of direct finance, automatic refinance or automatic credit guarantees. The
professional capabilities of these apex organisations need to be built so that they can
transition to these roles. This transition would considerably enhance the impact that
these institutions have with their limited refinance resources and simultaneously serve
to strengthen both originators as well as investors. This is also in line with the
recommendations of the Rajan Committee (2009).
5. This strategy seems particularly well-suited to those Public Sector Banks that are
unable to develop low-cost, low-risk, and effective direct origination strategies.
Recommendations:
4.9
The stipulation that the all-inclusive interest charged to the ultimate borrower by
the originating entity should not exceed the Base Rate of the purchasing bank plus
8 per cent per annum should be removed. [Identical to Recommendation 4.37]
4.10
Credit facilities documented as bonds or Pass-Through Certificates (PTC), whether
originated directly or purchased in the secondary markets should be permitted to
be held in the ―banking book‖ of a bank based on declared intent and not merely
based on source or legal documentation. [Identical to Recommendations 4.1(b) and
4.30]
4.11
RBI should represent to the Government of India to restore the tax-free status of
securitisation SPVs as pass-through vehicles for tax treatment so as to create
pathways for Wholesale Banks to provide liquidity to other Banks and Financial
Institutions directly originating assets in priority sectors. [Identical to
Recommendations 4.1(c) and 4.38]
4.12
Reorient the focus of NABARD, CGTMSE, SIDBI, and NHB to be market makers and
providers of risk-based credit enhancements rather than providers of direct
finance, automatic refinance, or automatic credit guarantees for National Banks.
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Credit: Regional Bank
Chapter 4.6
Regional Bank
This is a design in which there are several Regional Banks, each relatively small in size,
that are full-service Banks (offering credit, deposits, and payments services). This design
is also sometimes referred to as ―Small Banks‖ or ―Community Banks‖.
These are supervised directly by the national regulator (and depending upon their specific
structure and licence also by a State Regulator) and governed on a day-to-day basis by
their local boards. While these banks may borrow some amounts in wholesale markets
their principal source of funds is their local deposit base. A Regional Bank does not use
Capital Markets extensively for its resource raising nor does it use Agents in any form to
reach its customers – its only means of serving customers is typically through its branches.
History and Global Perspective
A country where this model of banking continues to be very important, though less so each
year, is the United States. It has 8,100 commercial banks, 1,200 Savings and Loans
Associations, and 12,000 credit unions (cooperative banks). Its top ten banks have only 60
per cent of total assets compared to Canada or UK where 4 or 5 banks dominate the
industry and have close to 90 per cent of the assets161. However, despite its resilience, the
model is in retreat in the USA because National Banks and Non-Bank Financial Institutions
have been able to bring both a wider range of products as well as lower cost of funds into
the home markets of the Regional Banks. And, as Petersen and Rajan (2002) suggest,
technology of information gathering, aggregation, and reporting has improved
dramatically and allows firms to address the traditional problems of adverse selection and
moral hazard in a completely different manner even when the distances between the
bank-branch and the firm are larger. The imposition of Basel III requirements on all these
banks is likely to compound the problems of survival faced by the local banks. Amongst the
few countries where this model of banking continues to thrive are Germany and
Switzerland and important lessons can be learnt from their experiences.
Developing countries that mandated community banks with low minimum capital
requirements produced hundreds of institutions that have had solvency problems while not
solving the inclusion problem (Nigeria, Tanzania) or have required intensive, subsidised
upgrading programs (Philippines, Ghana). The jury is still out on Mexico, but risks are
apparent. Supervisory capacity has been overwhelmed by many small institutions, leaving
weaknesses uncorrected.
This is not a new idea even in India. As of March 2012, there were 1618 Urban Cooperative
Banks in India, 82 Regional Rural Banks, 31 State Cooperative Banks (StCBs), and 370
District Central Cooperative Banks (DCCB) – all of which broadly meet the definition of
Regional Banks. In addition there are 92,432 Primary Agricultural Cooperative Societies
(PACS) which are single branch operations, but full-service. Within the rural cooperative
institutions, credit disbursement for agriculture is being done by PACS, while deposit
mobilisation is done by the PACS, DCCBs and StCBs. These organisations have enjoyed a
great deal of support from the financial system and from the government and have
achieved considerable outreach. However, with very few notable exceptions, they have
performed very poorly in terms of financial performance and will need a great deal of ongoing support to reach their full potential162.
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Table 4.6.1163
Gross NPAs of Cooperative Banks in 2011-12
Cooperative Bank Type
Gross NPA
Urban Cooperative Banks
7.0%
State Cooperative Banks
6.8%
District Central Cooperative Banks
9.7%
Primary Agricultural Credit Societies
26.8%
State Cooperative Agriculture and Rural Development Banks
33.1%
Primary Cooperative Agriculture and Rural Development
Banks
38.6%
In the private sector as well, while once again there are indeed notable exceptions such as
the highly profitable 110 year old City Union Bank which is focussed on the ThanjavurKumbakonam region of Tamil Nadu or the Jammu and Kashmir Bank, over the years many
Regional Banks such as the Bank of Rajasthan, Bank of Madura, United Western Bank, and
Ratnakar Bank have either failed and have had to be merged with stronger banks and
substantially recapitalised, or have sought to change their character to that of a National
Bank.
Benefits and Challenges
Regional Banks are likely to be lower cost and closer to the customer and therefore,
better equipped to originate vis-à-vis National Banks, but their local nature also makes
them more prone to ―capture‖. This has led to persistent governance problems and owing
to the higher exposure that they have to local systematic risk (weather, crop prices, and
regional economic performance), they are likely to have to pay a higher rate to their
depositors which in turn, might create the need to make ―riskier‖ loans resulting in a
vicious cycle of rising non-performing assets. A design that seeks to significantly grow this
category of institutions will place significantly higher regulatory and supervision demands.
And, even if the local regulatory and governance issues are taken care of, while there are
clear advantages to having a regional /local banking structure, there are also long-term
structural issues such as concentrated risks and the gradual ―hardening of soft
information‖ that has been discussed earlier which will erode the very raison d‘être of
these institutions unless they are dealt with effectively.
There is clearly one benefit from a development and financial inclusion perspective that
Regional Banks have that neither the large National Banks nor the non-bank financial
institutions demonstrate – their ability to collect local deposits ends up permanently
anchoring them to the local community in a way that the other institutions are not able to
match. This anchoring gives them both the desire and the requirement to stay connected
to the local community during both good times and bad ones. A National Bank could allow
a local branch to simply stay dormant because it is experiencing some difficulties and an
NBFI can simply pull-out but neither option is available to the Regional Bank and it is
forced to adapt itself to the local environment.
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Improving Governance
The Regional Rural Bank which was conceived of as a subsidiary of larger National Banks
was potentially a stronger design because it successfully dealt with the challenge of
―capture‖ by local political interests owing to its relationship with its parent, but
eventually did not perform as expected because gradually the culture and the cost
structure of the parent National Bank permeated into the Regional Bank as well and
overwhelmed the attempts at building a truly regionally focussed institution. Permitting
strong National Banks to float such subsidiaries with a different ownership structure may
allow them to overcome some of these difficulties and benefit from the inherent strengths
of these institutions.
A study on best practices followed by community banks in the USA that were able to
maintain the highest rating from their supervisors from 2006 to 2011 highlighted the
following164:
1. Commitment to conservative lending practices with emphasis on detailed underwriting
and credit policies even if this meant losing business to some competitors who were
increasing LTV ratios to gain more business
2. Presence of experienced senior management, coupled with a supportive, engaged
board of directors
3. Balance between growth objectives and risk level
4. Rigourous follow-up of delinquent loans – in some cases as early as 5 days past due
5. Emphasis on relationship banking based on detailed knowledge of their markets and
customers and avoiding market or products that they did not understand.
Board and management oversight is the fundamental element of ensuring a safe and sound
bank and director oversight is the primary driver that keeps a bank moving in a positive
direction, and is a critical component of a bank's success165. Therefore there is a strong
need to strengthen the board governance at the Regional Banks by ensuring that there are
high standards for board composition and operations as well as by proactively grooming
competent board members. Board governance for Regional Banks can be strengthened by
taking the following steps166:
1. Mandating high standards for Board Composition and Operations by specifying clearer
―fit and proper‖ standards for board members that ensure some relevant experience.
(e.g. mix of skills and stakeholders; independent directors; higher qualifications for
board chairs; board chair and CEO not the same person; no family members of CEO on
board). A few operational items could be mandated (existence of audit committee and
risk committee; reporting of internal auditor directly to the board; conflict of interest
standards; rotation of members). The German approach of a dual board structure: a
supervisory board and an executive board that runs the bank could also be explored.
2. Grooming competent board members. Governance training could be required of all
board members, or at least Chairs. Retired senior bankers may be appointed to Board
roles in these institutions and institutions such as College of Agricultural Banking
(CAB), Bankers Institute of Rural Development (BIRD), and Centre for Advancement in
Financial Research and Learning (CAFRAL) could be requested to develop such training
programmes along the lines of The Bank Director‘s Desktop developed by US Fed, the
Global Corporate Governance Forum developed by the IFC, and the Bank Negara
Malaysia sponsored Institute, the ICLIF, which offers a Financial Institution Directors
Education course to board directors across Asia.
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Credit: Regional Bank
Structural Issues
While improving the regulation and supervision of these institutions will address some of
the problems that they face there will be an active need to actually strengthen the
capabilities of these institutions so that they are able to overcome some of the structural
challenges that they face. Some of the steps, such as the adoption of Core Banking
Systems by these banks is on-going167 and will increase the capacity to do off-site
supervision but there are several more that will need to be taken, particularly with regard
to their capabilities to manage the variety of risks that they face:
1. Systematic Risk: Given their regional focus it is inevitable that in the process of
originating both larger and smaller loans they will end up building portfolio
concentrations that are unhealthy and attract a higher level of capital-penalty in their
Stress Tests than they have comfort with. They will need to continually and actively
rebalance their portfolio using sales and purchases of loans, bonds, securitised
portfolios, and credit derivatives. They will need to move away from an exclusive
originate-and-hold-to-maturity strategy and among other things, will need the ability
to be able to hold bonds in their banking book without having to mark them to market
and will gradually need to start to document all their loans using debenture / bond
documentation so that the liquidity of their balance sheet improves.
2. Rainfall Risk: In rural and agricultural lending, rainfall is the most important source of
exogenous risks which can have a region-wide impact. Banks have thus far tried to get
their clients to hedge this risk using crop insurance that is bundled along with a farm
loan. Unfortunately however, the entire rural book is exposed to this risk, even in the
non-farm portion of it, and the most efficient way for banks to hedge this risk is to
seek to protect the entire book against these shocks. Such a strategy also allows the
bank to carry out large scale waivers in case of a region-wide or a nation-wide shock to
rainfall without having to request for government funded bail-outs which have created
such a massive distortion in the farm level credit culture.
3. Commodity Price: Commodity price risk is the other big risk that needs to be hedged
using either insurance or commodity put options that the bank purchases on a
wholesale basis in global options markets. These are not options that are permitted to
be traded locally and in any case, from a national point of view there is value in laying
off the risks overseas. These could also be used to offer large scale loan-waivers in
case of extremely negative price events.
There are differences on this count even in the global experience. While the Swiss and the
German Regional Banks have explicitly tried to address this issue of risk management, the
US design has not done so and this perhaps is the main reason why the model is thriving in
these two countries while it is shrinking in the US. For example, the German Sparkassen
Banks are part of a national system that spreads risk across a system of Regional Banks and
national institutions which include the ―Joint Liability Scheme‖ of national and regional
guarantee schemes coordinated by the Deutscher Sparkassen und Giroverband (DSGV: the
German Savings Bank Association). Germany also has credit guarantee banks that lend
within each federal region or Land organised through the Verband Deutscher
Bürgschaftsbanken (VDB: the Association of German Guarantee Banks). They are nonprofit associations of lenders that historically provided sureties worth 80 per cent of the
loan value. Each guarantee bank would take on up to 35 per cent of the risk, while the
federal government took 40 per cent and the Land 25 per cent. The borrower pays a fee of
1-1.5 per cent of the loan plus an annual commission of 1-1.5 per cent on the amount
outstanding each year. Historically borrowers were at risk for 20 per cent of the loan
value, but as a result of the recent financial crash the German Government has
encouraged guarantee banks to cover 90 per cent of the risk and to take up to 50 per cent
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Credit: Regional Bank
themselves168. Similarly, the Swiss cantonal banks benefit from being part of the
Association of Cantonal Banks. The Association facilitates cooperation between the banks,
this allows the banks to benefit from economies of scale in providing products such as
pensions, investment advice and asset management. These services are provided by 20
network providers overseen by the ASCB, in an effort to ‗produce centrally, provide
locally‘. This local provision of services allows cantonal banks to create support schemes
or products specifically tailored for firms in their local market.
In India, SIDBI has been developing a pilot programme of lending to SMEs using a
specialised lending tool that they have developed in which they have partnered with
Urban Cooperative Banks and Regional Rural Banks. A broader set of similar partnerships
would encourage the stronger institutions to grow faster and build more product depth
relative to the poorer performing ones thus incentivising the weaker institutions to also
improve their performance.
A review of these experiences suggests some directions for improving performance of
Regional Banks in India.
Regulation and Supervision
Currently, there is considerable opacity about the true health of Regional Banks.
Cooperative institutions, given their unique structure, have very little interaction with
debt and equity markets – both public and private. In the context of the Cooperative Banks
the Rajan Committee (2009) recommended that: ―Indeed it [the Committee] would
suggest rethinking the entire cooperative bank structure and moving more to the model
practiced elsewhere in the world, where members have their funds at stake and exercise
control, debtors do not have disproportionate power, and government refinance gives way
to refinancing by the market‖169. This suggests that integrating Regional Banks into the
more mainstream financial markets may offer one way out in which refinance by NABARD
or Credit Guarantee support by CGTMSE is offered not on automatic basis but as a fairly
priced second-loss deficiency guarantee allowing the Regional Bank to sell its originated
loans either directly to other institutional investors, including National Wholesale Banks.
All of this will serve to reveal more information about the financial health of these
institutions and enable the stronger ones to forge more partnerships and grow.
While the Risk Based Supervision process has been designed for the larger and more
complex institutions, a similar effort could be conceived of for the Regional Banks
allowing supervisors to direct scarce on-site supervision resources to higher-risk
institutions. The help of commercial ratings agencies such as CRISIL could also be taken to
formally rate these Regional Banks and provide the ratings to the depositors on a regular
basis – thus including them more directly into the risk-containment process. Since DICGC
offers deposit insurance to these banks, the Agreement between DICGC and the bank
provides an additional opportunity to both ensure that the bank is run well on an on-going
basis and resolved quickly in the event that it turns insolvent. Such an Agreement would
provide for risk-based pricing of deposit insurance; the right to carry out both on-site and
off-site inspections; and to take possession of the bank in the event that it goes into
liquidation. FDIC provides a good model for such an engagement between a deposit insurer
and a Regional Bank.
Given the sheer size of the country and each state, it is clear that there will be a need to
build much stronger regulatory capacity at the state level. There is a considerable amount
of financial regulation that happens at the state level even today in India. For instance,
the Registrar of Chits regulates the chit fund industry and the Registrar of Cooperatives
regulates cooperatives in each state. In addition the RBI has recommended that regulation
of NGO-MFIs also be done at the state level. However, this state level financial regulatory
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Credit: Regional Bank
framework is fragmented and there is merit in the creation of a State Finance Regulatory
Commission (SFRC) into which all the existing State Government-level regulators could be
merged and functions like the regulation of NGO-MFIs and local Money Services Business
(referred to in Chapter 3.1) could be added on. In some states, the SFRC could be created
by upgrading existing Institutional Finance Cells. There is also value in bringing regulatory
function close to the enforcement function under the Economic Offences Wing (EOW), so
as to ensure that they are working closely together. The RBI must be closely involved over
a longer time frame in training the commissioners and licensing and accrediting the
Commission itself. The local regional directors of the RBI could, for example, be ex-officio
Chairs of the Commission‘s Board of Governors while the Commissioner could be a senior
State level appointee drawn from the local Banking community. The District Magistrates
would also play an important role in their respective districts. In the US which has the
most varied and deep financial system relative to any other country, each state has a
similar commission170. This is the process through which, jointly with the FDIC, the US ends
up effectively regulating the variety of institutions that make up the financial services
landscape in that country171.
Recommendations:
4.13
Regional Banks continue to have a strong appeal for inclusion but low
demonstrated stability in the Indian context. Robust solutions are required vis-à-vis
regulation, supervision, risk management, and governance of the existing Regional
Banks before any new ones are created.
4.14
In a manner similar to National Banks, for Regional Banks as well, refinance by
NABARD or credit guarantee support by CGTMSE should be designed as risk-based
guarantees and not available automatically. [Similar to Recommendation 4.12]
4.15
While the Risk Based Supervision process has been designed for the larger and more
complex institutions, a similar effort could be conceived of for the Regional Banks
allowing supervisors to direct scarce on-site supervision resources to higher-risk
institutions. The help of commercial ratings agencies could also be taken to
formally rate these Regional Banks and provide the ratings to the depositors on a
regular basis – thus including them more directly into the risk-containment process.
4.16
Since DICGC offers deposit insurance to these banks, the Agreement between
DICGC and the bank provides an additional opportunity to both ensure that the
bank is run well on an on-going basis and resolved quickly in the event that it turns
insolvent. Such an Agreement would provide for risk-based pricing of deposit
insurance; the right to carry out both on-site and off-site inspections; and to take
possession of the bank in the event that it goes into liquidation.
4.17
A State Finance Regulatory Commission (SFRC) could be created into which all the
existing State Government-level regulators could be merged and functions like the
regulation of NGO-MFIs and local Money Services Business could be added on. In
some states, the SFRC could be created by upgrading existing Institutional Finance
Cells. There is also value in bringing the regulatory function close to the
enforcement function under the Economic Offences Wing (EOW), so as to ensure
that they are working closely together. The RBI must be closely involved over a
longer time frame in training the commissioners and licensing and accrediting the
Commission itself. The local regional directors of the RBI could, for example, be
ex-officio Chairs of the Commission‘s Board of Governors while the Commissioner
could be a senior State level appointee drawn from the local Banking community.
The District Magistrates would also play an important role in their respective
districts.
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Credit: Non-Banking Financial Company
Chapter 4.7
Non-Banking Financial Company
The total number of registered NBFCs was 12,225 as on March 31, 2013 comprising 254
deposit taking NBFCs (D-NBFCs), 418 systemically important non-deposit taking NBFCs
(NBFCs-ND-SI) whose asset size exceeded Rs. 100 crore172. The ratio of the deposits of all
NBFCs relative to the liabilities of the banking system is less than 1 per cent173. NBFCs are
classified on the basis of their activity into six categories: Loan Companies, Investment
Companies, Asset Finance Companies, Infrastructure Finance Companies, Systemically
Important Core Investment Companies, and Micro Finance Institution NBFCs. Retail NBFCs
have better origination and collection capabilities and are able to reach out to the
customer to perform door-step services. For instance, comparing the portfolio of housing
loans originated by Banks and NBFCs, it emerges that Housing Finance Companies
outperform Banks in terms of Gross NPAs with defaults of only 0.68 per cent on 2012,
when compared to 2.63 per cent for Banks174. Eighty per cent of AUM of all retail NBFCs in
the CRISIL-rated portfolio have an outstanding rating in ‗AA‘ or above. These institutions
have anywhere between 10 to 20 per cent of capital adequacy.
One of the most important concerns expressed about the NBFCs is that they are shadow
banks since they operate outside the regular banking sector but perform many of the same
functions. The European Commission in its most recent paper lists entities and activities
that it considers as a part of Shadow Banking175. These include: Special purpose entities
which perform liquidity and/or maturity transformation; for example, securitisation
vehicles such as ABCP conduits, Special Investment Vehicles (SIV) and other Special
Purpose Vehicles (SPV); Money Market Funds (MMFs) and other types of investment funds
or products with deposit-like characteristics, which make them vulnerable to massive
redemptions ("runs"); Investment funds, including Exchange Traded Funds (ETFs), that
provide credit or are leveraged; Finance companies and securities entities providing credit
or credit guarantees, or performing liquidity and/or maturity transformation without being
regulated like a bank; Insurance and reinsurance undertakings which issue or guarantee
credit products; Securitisation; and Securities lending and repo.
Based on the above definition, NBFCs fall in the category of finance companies that
provide credit. However, as can be seen from the Table given below, NBFCs in India, for
the most part are regulated proportionately to a Bank. Therefore in accordance with the
European Commission definition, with some changes, they could be considered as an
integral part of the larger banking system and not as Shadow Banks. In fact in ―French
banking legislation the definition of a bank arises from only the asset side of the balance
sheet, that is, from lending. Consequently, in France regardless of how credit institutions
fund themselves, they are considered banks, and, as such, subject to all banking
regulation‖176.
Table 4.7.1
Norms for Different Types of Institutions
Banks
NBFC
Mutual
SPV
Fund
Capital adequacy
YES
YES
NO
NO
rules on credit risk
Risk-weighting of
YES
YES
NO
NO
assets
Provisioning and
YES
YES
NO
NO
NPA norms
Fair Practice Code
YES
YES
NO
NO
Insurance
Company
NO
NO
NO
YES
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Credit: Non-Banking Financial Company
Rationale for Differentiated Treatment of Banks and NBFCs
The gaps in the manner in which Banks and NBFCs are currently treated in India are
mentioned in Table 8. It is not clear however, if full convergence is immediately possible
and in some cases even desirable. For example, while it is clear that SLR as a prudential
tool has outlived its utility for both Banks and NBFCs and eventually needs to be removed,
it is not as obvious that even niche NBFCs which are engaged in promoter funding or
specialised infrastructure lenders should be required to adhere to Priority Sector Lending
norms or be given access to the Lender of Last Resort (LOLR) facilities.
While NBFCs in their current format play a useful role and will continue to do so, and
every effort needs to be made to ensure that they are able to perform that role
effectively, they will, of necessity, have limits to how large they can become. This will be
the case on account of differentiated capital adequacy requirements, absence of access to
payment systems, constraints imposed by dual regulation, and other restrictions on the
nature of business they are allowed to undertake and the nature of risks they are allowed
to take. From a systems design perspective this would be required because as players
outside the banking system they would not enjoy the same degree of protection as banks
would, and nor would the three principles of Stability, Transparency, and Neutrality apply
to them in the same degree. The differentiated banking design offers multiple end points
towards which NBFCs could head, particularly if issues such as SLR requirements, uniform
applicability of CRR requirements, and the current definition of PSL which is rooted in
historical perspectives, are satisfactorily dealt with. It needs to be borne in mind that
other than a small number of entities, the bulk of the NBFC sector remains very small,
does not have the ability to garner public deposits, and in aggregate has performed at a
very high level of quality. The sector as a whole therefore does not constitute a source of
systemic instability. It has instead been playing the role of extending the reach of the
banking system to the more difficult parts of the economy.
Table 4.7.2
Comparison of Regulatory Treatment of Banks and NBFCs
Regulations
Banks
NBFC
Discussion
Minimum Capital
9%
15%
No case for
Adequacy
convergence.
Cash Reserve Ratio
4%
N.A CRR applicable on
bank deposits,
shift to exclude
time deposits
recommended.
Statutory Liquidity
23%
15% for D-NBFCs
Complete
Ratio
on their deposits
elimination
recommended.
Duration to qualify
Non-repayment for 90
Non-repayment
Case for
for NPA
days
for 180 days
convergence.
Risk-based
approaches to be
followed for both
types of
institutions.
Definition for subNPA for a period not
NPA for a period
Case for
standard asset
exceeding 12 months
not exceeding 18
convergence.
months
Risk-based
approaches to be
followed for both
types of
institutions.
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Credit: Non-Banking Financial Company
Definition for
doubtful assets
Remaining sub-standard
asset for a period of 12
months
Quantum of
provisioning for
Standard Assets
Direct advances to
agricultural and Small
and Micro Enterprises
(SMEs) sectors at 0.25%
Priority Sector
40% of ANBC
NIL
Deposit Insurance
YES
NO for D-NBFCs
SARFAESI eligibility
YES
NO
Lender of Last
Resort
Risk Weights
YES
NO
Differential
100% for all
assets
Rs. 2-5 crore
Entry Capital
Requirement
Rs. 500 crore
Remaining substandard asset for
a period
exceeding 18
months
0.25%
Case for
convergence.
Risk-based
approaches to be
followed for both
types of
institutions.
Case for
convergence.
Risk-based
approaches to be
followed for both
types of
institutions. For
agricultural
advances, this
would imply at
least 0.40%.
No case for
convergence.
No case for
convergence.
Case for
convergence.
No case for
convergence.
No case for
convergence.
No case for
convergence.
1. Risk Weights: While it is true that an NBFC may have assets on its books that have a
lower expected loss rate and therefore should see the benefit in terms of Standard
Asset Provisioning, it is also the presumption that an NBFC is likely to have a
sectorally or regionally concentrated asset profile relative to a bank and therefore
the aggregate portfolio level risk of default would not benefit from the kind of
diversification that a bank would have. It would therefore be prudent to not give a
lower risk weight to an asset on the books of an NBFC to compensate for the higher
correlation risk between assets.
2. Capital Adequacy: The NBFC is presumed to be a niche participant getting into
harder to reach categories, and therefore, relative to a full service National Bank
which in contrast is presumed to operate in less risky categories, while permitted
to enter with lower thresholds so that it can serve even very small niches, it will
need to maintain a higher level of capital adequacy.
3. Priority Sector: While several NBFCs are deeply present in priority sectors already,
for others, given their relatively small size and niche role, they may not be in a
position to fulfill priority sector obligations and it may be desirable to have them
focus on other sectors.
4. Entry Capital Requirement: Given the non-deposit taking nature of these entities, a
high barrier in terms of entry capital does not seem necessary. As noted above,
several of them have assets under management of less than Rs. 100 crore and may
be quite regionally or sectorally specialised.
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Credit: Non-Banking Financial Company
As noted previously, there are several categories of non-deposit taking NBFCs based on
their activity and new ones are being proposed such as the Small Business NBFC. The
Committee believes that a proliferation of categories is unwieldy, creates room for
regulatory arbitrage, and hinders the evolution of NBFCs which have the ability to provide
the broad range of credit products envisaged in the vision statement. The Committee
recommends a consolidation of multiple NBFC definitions into a two categories: a distinct
category for Core Investment Companies (CIC) and another category for all other NBFCs.
Benefits that were previously available to specific NBFC types, such as tax benefits, bank
limits, and priority sector status may continue to be available even after consolidation on
a pro-rata asset basis. As discussed previously, the supervision strategy is recommended to
be risk-based. The Rajan Committee (2009), in its report also notes177 that balkanisation
forced by regulation even between areas of the financial sector that naturally belong
together can result in financial institutions not being able to realise economies of scope in
these areas, leading to inefficiency and slower growth. The asset class differences in
behaviour can be accommodated through differential provisioning on the basis of asset
class rather than by creating new NBFC categories.
Funding Issues:
Given that the large majority of NBFCs are not deposit-taking, they rely on wholesale
funding and this has a direct bearing on their ability to grow. Other than equity, wholesale
funding includes the following sources: borrowings from banks, refinance from apex
institutions, borrowings through External Commercial Borrowing (ECB), sale of securitised
assets, and issuance of bonds to capital markets investors. There are constraints within
each of these. These constraints need to be addressed in a systematic manner instead of
creating new deposit-taking NBFCs or following an accelerated process of full-service bank
licensing.
1. Banks have been an important source of funding for NBFCs and will continue to be so.
While NBFCs have historically not been a source of systemic risks for the banks, it has
indeed been the case that shocks to the banking system (as witnessed in 2008) have
had a significant negative impact on the NBFCs178. Therefore, from the perspective of
diversifying the liabilities of NBFCs and minimising liquidity risks, it is important to
deepen capital markets access for NBFCs. Investors such as mutual funds, insurance
companies, provident and pension funds and private accredited investors could
complement bank funding to this sector.
2. There has been concern around NBFCs raising public deposits via the Non-Convertible
Debentures route. It is recommended that a clear framework be developed for
Qualified Institutional Buyers (QIBs) and Accredited Individual Investors (AIIs) who may
participate in these issuances and clarifications issued on NBFC eligibility for the shelf
prospectus facility. Section 60A of Companies Act, 1956 had explicitly provided the
eligibility list for availing the ―Shelf Prospectus‖ facility only to public sector banks,
scheduled banks and public financial institutions. Even though SEBI had amended the
SEBI (Disclosure and Investor Protection {DIP} guidelines)179 to this effect to give effect
to the same and then through SEBI (Issue and Listing of Debt Securities) (Amendment)
Regulations, 2012 issued on 12th October 2012 had permitted the availability of ‗shelf
prospectus‘ for a period of 180 days for any issuer going for private placement of debt.
Now that Section 31 of the new Companies Act, 2013 does not prescribe the eligibility
list and enables the entities as approved by SEBI to avail the said facility, it would
ensure level playing field if all issuers are brought into this ambit so that the benefit of
‗shelf prospectus‘ is available for one year to all issuers instead of 180 days.
3. NBFCs have been important issuers in the securitisation market, particularly in the
context of priority sector assets. As discussed previously, this is a promising alternative
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Credit: Non-Banking Financial Company
to forcing all Banks to originate assets directly. RBI guidelines on securitisation have
been very enabling. However, the tax-exempt status of pass-through securitisation
vehicles needs to be restored.
4. Norms on External Commercial Borrowing are rigidly defined and eligibility varies
across different categories of NBFCs. It is recommended that there be more flexibility
within this category. Specifically, ECB in Rupees needs to be permitted for all
institutions. For ECB not in Rupees, eligibility to be linked to size and capacity to
absorb foreign exchange risk rather than specific NBFC categories.
5. Access to various refinance schemes is restricted by institution type rather than
activity, thus violating the Neutrality principle as far as NBFCs are concerned. For
instance, most of NABARD‘s existing refinance schemes (includes schemes which
amounted to Rs. 66,095 crore in 2012-13 for crop loans to farmers by commercial
banks, RRBs, and cooperative banks)180 and guarantees under SIDBI‘s Credit Guarantee
Trust for Micro and Small Enterprises (CGTMSE)181 are not available for NBFCs even if
they are engaged in eligible lending activities under these schemes.
6. As far as equity funding is concerned, the minimum capitalisation norms are provided
for NBFCs based on foreign ownership. The capitalisation slabs are USD 0.5 million,
USD 5 million and USD 50 million for foreign capital below 51 per cent, below 76 per
cent, and above 75 per cent respectively. These limits are quite steep and, in the
context of scarce domestic equity capital, make it far too difficult to access foreign
sources of equity, including patient capital from DFIs and this may have a link to
higher pricing of loans from NBFCs, in particular NBFC-MFIs. If the root cause of these
restrictions is related to money laundering concerns, that may be mitigated by
instituting additional reporting requirements on Banks/Authorised Dealers (AD) that
enable these transactions.
Risk Management:
While it is indeed the case that the non-bank character of NBFCs makes them less of a
systemic risk concern on a national basis, on a regional or a product market basis, failure
of an NBFC can have severe consequences for clients and local economies where they may
have been the sole or dominant formal provider. Research by IGIDR that studied the
impact of the Microfinance Ordinance on households in Andhra Pradesh, found that
consumption dropped by 19.5 per cent over the one year after the crisis across all income
classes, and the income class with the highest use of micro-credit, experienced a negative
impact on even food consumption182. It can therefore be concluded that failures in the
NBFC sector can have negative consequences for the real sector. It is important therefore
to ensure that while NBFCs may continue to enjoy some exemptions, such as that on
minimum entry capital, adequate attention is paid to the manner in which they manage
their risks.
1. Liquidity risk: Due to the added significance of the underserved populations to the
politics of both State and Central governments, as well as the existence of more than
one regulatory authority for certain types of credit institutions and the delays in
attaining regulatory clarity wherever loopholes exist, extending financial services to
underserved segments is fraught with risk. This in turn has real consequences for credit
delivery. It drives investors in such institutions to demand a higher risk premium to
mitigate this perceived risk, which translates to higher prices of offering credit to the
end customer. This risk is best exemplified by the Andhra Pradesh Micro Finance crisis
of 2010, where an ordinance passed by the State Government resulted in large losses
to portfolios of several MFIs; impairment in the credit behaviour of borrowers and a
withdrawal of credit facilities by all banks to all MFIs, even those outside Andhra
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Credit: Non-Banking Financial Company
Pradesh183.There is a need to adequately protect the sector against correlated
behaviour by commercial banks and regulators. If this risk can be mitigated through
catastrophic insurance or a guarantee fund, it can benefit lenders and improve ratings
of these entities.
2. Provisioning: Different customer asset sub-groups behave very differently from each
other and it is recommended that the regulator specify NPA recognition and
provisioning rules, including for standard assets, at the level of each asset-class and
require that all NBFCs conform to these mandates.
3. Risk Measurement and Disclosure: Require all NBFCs to have better on-going risk
measures. These include disclosure of their stress test results both at an overall
balance sheet level as well as at a segmental level on an annual basis. All NBFCs must
adopt core banking systems so that they are able to do the sophisticated reporting
required for effective off-site supervision.
Micro Finance Institution-NBFCs
NBFC-MFIs are a specific type of NBFC created by RBI in December 2011 as the seventh
category within NBFCs. NBFC-MFIs typically serve low-income women clients in rural and
urban environments through a group loan product. 22 per cent of all small borrower
accounts are with MFIs. This is higher than the number of such accounts with Commercial
Banks or RRBs. An NCAER study found that most MFI borrowers belonged to the 31-40 years
group, in their productive years, who needed credit most in the absence of employment
opportunities and a vast majority of the borrowers were either illiterate or had studied
only up to primary level184. These loans are used for a variety of purposes including
repayment of informal debt, house repair and renovation, purchase of livestock,
agriculture, education and household consumption including health expenditures.
The NBFC-MFI guidelines of 2011, subsequently amended in 2012, laid down specific
requirements in terms of: minimum net owned funds requirement which at Rs. 5 crore is
higher than the Rs. 2 crore requirement for regular NBFCs; margin caps of 10 per cent and
12 per cent for large and small MFIs respectively; caps on number of loans to a client; caps
on loan ticket size; restrictions on loan tenure; defining qualifying assets as comprising
pre-dominantly income-generating loans to clients of a certain income; and mandatory
credit bureau reporting. Many of the criteria that determine whether an NBFC can be an
NBFC-MFI, such as the borrower income criteria185, loan size and tenure186, number of
borrowings187, purpose of loan188, have the potential to create undesirable consequences,
both for the end borrowers and the lending institution.
There has been a lot of concern about the rates of interest charged by MFIs and is the
reason why the NBFC-MFI regulations included a price cap, in what was viewed as a
significant reversal of policy stance on interest rate deregulation being followed by RBI.
This was also in contrast to recommendations of the Rajan Committee (2009), which
advocated for liberalising the interest rate charged, but putting in place requirements of
transparency as well as eligibility for accessing priority sector funding189. Despite all this,
it was a welcome first step because it assuaged the anxieties around ―extreme
profiteering‖ by MFIs and also ensured that there was a public endorsement of the critical
role that these institutions play; a reaffirmation of the fact that RBI was actively involved
in their oversight; and that indeed in its judgment these rates were justified on account of
the higher cost to serve this very vulnerable client group.
MFI interest rates are currently around 26 per cent with cost of funds accounting for about
13-14 per cent of this. Competitive forces have not produced price competition in this
sector and most MFIs have similar levels of pricing. There is a concern that the current
NBFC-MFI guidelines that restrict the number of MFIs serving a client are effectively acting
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as a barrier to entry thus limiting the competitive forces operating in the sector. Another
reason why sharp reductions in interest rate, proportionate to costs are not being
witnessed is that many MFIs finance growth through revenues rather than equity capital.
Increasing the sources of equity funding is therefore an important aspect of bringing down
interest rates in the MFI sector even as it continues to expand its outreach. There are
wide variations in the cost structures of MFIs and the price cap has indeed created
conditions in which the low cost players are no longer required to offer the benefit of
these costs to their customers. Some of the ways to address this issue include the
following:
1. Enable better benchmarking by requiring all NBFC-MFIs to disclose their operating costs
(direct and indirect) of a mature branch to the RBI or MFIN once it becomes an SRO.
2. Total borrowing limit for the small borrower segment may be increased immediately to
Rs. 100,000 across all lenders. If total indebtedness is being tracked adequately, the
stipulation of a maximum number of lenders appears redundant and can be gradually
removed as this would also help in creating intensified price competition. This is
consistent with focus on total indebtedness of the small borrower in relation to their
debt-servicing capacity and not just indebtedness per se or merely from NBFC-MFIs.
3. Gradually phase out the restriction on NBFC-MFI from making larger value loans (> Rs.
50,000). This constrains their diversification into categories such as home loans and
small business loans.
Regulation such as restricting the proportion of consumption finance by NBFC-MFI has
constrained lending for consumption purposes for low-income households and has
overwhelmingly laid policy emphasis on credit for income-generation. That this is a
misplaced notion is well-articulated by the RBI Governor Raghuram Rajan‘s statement of
the importance of credit to smoothen consumption needs and to tide over emergencies for
low-income households190. A mechanical emphasis on income-generating loans also
produces new risks linked to success of the project and may trigger a shift to more
expensive informal loans for the purpose of consumption smoothing. There is also no
empirical evidence that at the current levels increases in the quantum of formal credit has
led to unsustainable levels of consumption producing higher levels of credit risk. All policy
biases against consumption finance need to be removed, particularly since total formal
sector indebtedness can now be tracked through credit bureaus.
Additionally, meeting the complete financial services needs through household
assessments is a more promising approach to serving low-income households than narrowly
assessing product requirements of individuals.
Transition of NBFCs to Differentiated and National banks
Entities that start out as a niche NBFC may over time acquire the profile of a Bank, and
would need to be able to transition smoothly into either a Full Service Bank or a Wholesale
Consumer Bank or a Wholesale Investment Bank.
Currently there are specific barriers that prevent several of those entities that already
have the character of Banks from becoming one. These include:
1. Current definitions of PSL are restricted only to a few sectors. Specialised NBFCs
operating in sectors such as infrastructure are not able to include their loans as PSL
and will have to originate in sectors where they have no expertise, for example,
agriculture.
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2. Absence of markets to trade in PSL assets. The definitional issue in PSL is compounded
by inability to buy and sell PSL assets. This forces every player to create their own
origination capability and this is challenging for players who may have the liquidity to
purchase PSL assets but not the expertise to build origination engines.
3. SLR is applied on all banks despite no prudential reason to do so in the presence of
capital adequacy guidelines.
4. CRR is uniformly applied on demand and time liabilities, instead of just on demand
liabilities.
The Committee recommends that these barriers be expeditiously addressed because they
will both enhance the effectiveness of existing Banks as well as allow strong NBFCs to
enter as Differentiated Banks or National Banks, without abandoning their core
capabilities. As noted previously, this has the potential to significantly strengthen
financial deepening in India.
This transition will have a number of benefits to the NBFCs:
1. The concerns of dual regulation will be properly addressed.
2. Being accorded the status of a bank, even if only a Wholesale Bank, will give them
access to the payments system and protection under LOLR facilities.
3. There will be full convergence on all other fronts, including capital adequacy.
However, even without these changes, for a group of NBFCs, such as those that are
already engaged substantially in originating loans that qualify under current PSL
guidelines, may benefit from a transition even under the current regime.
Accordingly, the Committee recommends that under the Banking Regulation Act, a set of
banks may be licensed which may be referred to as Wholesale Banks with the following
characteristics:
1. Given that their primary role is lending and not the provision of retail deposit services,
they will only be permitted to accept deposits larger than Rs. 5 crore.
2. Since they could expect to borrow large amounts from other banks, net liabilities from
the banking system will be permitted to be deducted from their NDTL computation for
the purposes of ascertaining their SLR obligations on par with the treatment currently
given for CRR.
3. Since other banks are expected to lend large amounts to Wholesale Banks, those other
banks will be permitted to deduct their net assets to the banking system from the
computation of their ANBC (the amounts on which PSL requirements are to be
applied).
4. In view of the fact that they will not take retail deposits, the minimum entry capital
requirement for them will be Rs. 50 crore compared to the Rs. 500 crore required for
full-service SCBs.
5. If the institution has fewer than twenty branches through which it operates, it will not
be required to meet the 25 per cent branching requirement. Institutions with twenty
or fewer branches could be referred to as Wholesale Investment Banks while those
with a larger branch network could be referred to as Wholesale Consumer Banks.
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6. Wholesale Consumer Banks could be permitted to act as BCs for other full service
banks.
7. They will be required to comply with all other RBI guidelines relevant for SCBs and will
be granted all the other rights and privileges that come with that licence.
Recommendations:
4.18
The Committee recognises that a partial convergence of NBFC and Bank regulations
may be desirable. It recommends the following:
Regulations
Minimum Capital
Adequacy
Cash Reserve Ratio
Banks
NBFC
9%
15%
4%
N.A
Statutory Liquidity
Ratio
23%
15% for D-NBFCs
on their deposits
Duration to qualify
for NPA
Non-repayment for 90
days
Non-repayment
for 180 days
Definition for substandard asset
NPA for a period not
exceeding 12 months
NPA for a period
not exceeding 18
months
Definition for
doubtful assets
Remaining sub-standard
asset for a period of 12
months
Remaining substandard asset for
a period
exceeding 18
months
Quantum of
provisioning for
Standard Assets
Direct advances to
agricultural and Small
and Micro Enterprises
(SMEs) sectors at 0.25%
Priority Sector
40% of ANBC
0.25%
NIL
Recommendation
No case for
convergence.
CRR applicable on
bank deposits,
shift to exclude
time deposits
recommended.
Complete
elimination
recommended.
Case for
convergence.
Risk-based
approaches to be
followed for both
types of
institutions.
Case for
convergence.
Risk-based
approaches to be
followed for both
types of
institutions.
Case for
convergence.
Risk-based
approaches to be
followed for both
types of
institutions.
Case for
convergence.
Risk-based
approaches to be
followed for both
types of
institutions. For
agricultural
advances, this
would imply at
least 0.40%.
No case for
convergence.
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Deposit Insurance
YES
NO for D-NBFCs
SARFAESI eligibility
YES
NO
Lender of Last
Resort
Risk Weights
YES
NO
Differential
100% for all
assets
Rs. 2-5 crore
Entry Capital
Requirement
Rs. 500 crore
No case for
convergence.
Case for
convergence
subject to strong
customer
protection
guidelines.
No case for
convergence.
No case for
convergence.
No case for
convergence.
4.19
Multiple NBFC definitions should be consolidated into two categories: a distinct
category for Core Investment Companies (CIC) and another category for all other
NBFCs. Benefits that were previously available to specific NBFC types, such as tax
benefits, bank limits, and priority sector benefits should continue to be available
even after consolidation, on a pro-rata asset basis.
4.20
The Committee recommends addressing wholesale funding constraints faced by
NBFCs in a systematic manner. The following are the specific recommendations in
this regard:
a. A clear framework to be developed by RBI and SEBI for Qualified Institutional
Buyers and Accredited Individual Investors who may participate in debt market
issuances of NBFCs.
b. Benefit of ‗shelf prospectus‘ should be available for one year to all issuers
including NBFCs.
c. Permit ECB in Rupees for all institutions.
d. For ECB not in Rupees, eligibility should be linked to size and capacity to
absorb foreign exchange risk rather than specific NBFC categories.
e. The nature of activity, rather than institution type, must be made the criterion
for availing refinance from NABARD, NHB, SIDBI and credit guarantee facilities.
f. Current capitalisation slabs on foreign equity funding should be relaxed and
money laundering concerns should be mitigated by instituting additional
reporting requirements on Banks/Authorised Dealers (AD).
4.21
In a manner similar to banks, different customer-asset combinations behave very
differently from each other and it is recommended that the regulator specify NPA
recognition and provisioning rules, including for standard assets, at the level of
each asset-class and require that all NBFCs conform to these mandates. [Identical
to Recommendation 4.3 for National Banks]
4.22
Require all NBFCs to have better on-going risk measures. These include disclosure
of their stress test results both at an overall balance sheet level as well as at a
segmental level at least annually. All NBFCs must adopt core banking systems so
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that this can enable better off-site supervision. [Identical to Recommendation 4.4
for National Banks]
4.23
Enable better benchmarking by requiring all NBFC-MFIs to disclose their operating
costs (direct and indirect) of a mature branch to the RBI or MFIN once it becomes
an SRO.
4.24
The regulatory focus must be on total indebtedness of the small borrower in
relation to their debt-servicing capacity and not just indebtedness per se or merely
from NBFC-MFIs. Keeping this in mind, the total borrowing limit for the small
borrower segment may be increased immediately to Rs. 100,000 across all lenders,
including bank-lending to this segment. In order to implement this, all lenders to
this segment will need to be mandated to report to the credit bureau as has been
the case with NBFC-MFIs. If total indebtedness is being tracked adequately, the
stipulation of a maximum number of lenders appears redundant and can be
gradually removed as this would also help in creating intensified price competition.
4.25
All policy biases against consumption finance need to be removed. An example of
this is restricting the proportion of consumption finance that is permitted for NBFCMFIs.
4.26
In order to enable the gradual transition of eligible and interested NBFCs to
Wholesale Consumer Banks or Wholesale Investment Banks or National Banks, the
Committee recommends a re-examination of PSL definitions [also see
Recommendation 4.41], creating an active market for PSL assets, assessment of the
relevance of SLR in light of capital adequacy norms, and application of CRR on time
liabilities.
4.27
Under the Banking Regulation Act, a set of banks may be licensed which may be
referred to as Wholesale Banks with the following characteristics:
a. Given that their primary role is lending and not the provision of retail deposit
services, they will only be permitted to accept deposits larger than Rs. 5 crore.
b. Since they could expect to borrow large amounts from other banks, net
liabilities from the banking system will be permitted to be deducted from their
NDTL computation for the purposes of ascertaining their SLR obligations on par
with the treatment currently given for CRR.
c. Since other banks are expected to lend large amounts to Wholesale Banks,
those other banks will be permitted to deduct their net assets to the banking
system from the computation of their ANBC (the amounts on which PSL
requirements are to be applied).
d. In view of the fact that they will not take retail deposits, the minimum entry
capital requirement for them will be Rs. 50 crore compared to the Rs. 500 crore
required for full-service SCBs.
e. If the institution has fewer than twenty branches through which it operates, it
will not be required to meet the 25 per cent branching requirement.
Institutions with twenty or fewer branches could be referred to as Wholesale
Investment Banks while those with a larger branch network could be referred to
as Wholesale Consumer Banks.
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Credit: Non-Banking Financial Company
f. Wholesale Consumer Banks should be permitted to act as BCs for other full
service Banks.
They will be required to comply with all other RBI guidelines relevant for SCBs and
will be granted all the other rights and privileges that come with that licence.
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Credit: Priority Sector Lending
Chapter 4.8
Priority Sector Lending
Introduction
Directed lending through efforts such as the Priority Sector Lending (PSL) program of the
RBI have had a well-established history across many countries at different points in their
development and have served a different purpose in each country191. In India while priority
sector focus has existed from the 1950s in some form or the other, the Priority sector
Lending (PSL) program in its current form has been implemented by the RBI since 1974,
when banks were advised to raise credit to specified priority sectors of the economy to
the level of 33.3 per cent by March 1979192. Currently this number stands at 40 per cent
with the sectoral allocation specified in Table 4.8.1193.
Sector
Direct Agriculture
Indirect Agriculture
SME
Weaker sections
Table 4.8.1
Priority Sector Allocation
% of ANBC
13.5%
4.5% to qualify within
agriculture and excess as part
of the overall 40% target
Within the overall 40% target
10%
Remarks
Sub-targets based on size of
the SME
Includes segments such as
distressed farmers, scheduled
castes and tribes, women up to
Rs.50,000
Starting with this sectoral allocation the two important questions that need to be
answered are: how best to achieve PSL targets? and how to set these targets? This chapter
discusses both of these questions and makes some recommendations on how the current
approaches may be improved upon.
Definitional Issues
While a later section in this chapter discusses whether the current sectoral approach
towards setting PSL obligations is the best one and whether, over time, there would be a
case to move to an entirely different approach, there are aspects of the current PSL
guidelines that need to be reaffirmed and certain anomalies that need to be addressed.
1. There have been several suggestions made to relax the eligibility criteria within
current sectors of PSL. However, given the vast unmet need for credit for sectors
under even current definitions, this does not appear desirable. For example, while
exact data is not available, both national level and field level data indicate that
agriculture continues to be heavily under-banked. At the national level, from Table 2.3
in Chapter 2.2 it can be seen that against a minimal aspiration of 50 per cent Credit to
GDP for each sector, while Industry is at 87 per cent, agriculture is only at
approximately 36 per cent - offering perhaps one explanation for the inflationary and
supply side shocks emerging from that sector of the economy. At the field level, based
on the data from a rural financial institution in Tamil Nadu and NABARD‘s scale of
finance estimates, the demand for credit by small and marginal farmers at a Gram
Panchayat level comprising fewer than 2,000 small and marginal farmer households, is
about Rs. 1.95 crore194. If this is assumed to be the level of demand for all the 2.46
lakh Gram Panchayats in India, it produces an estimate of Rs. 4.8 lakh crore as the
credit demand from small and marginal farmers alone. This is approximately equal to
the amount of total credit that currently flows to the entire agricultural sector in India
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Credit: Priority Sector Lending
– both direct and indirect. Similarly, another field level estimate195 shows credit
demand for micro-enterprises just in Bangalore Urban District alone to be
approximately Rs. 17,000 crore. If merely 25 urban centres have a similar level of
credit demand from micro-enterprises, just this sector alone would require more than
Rs.4 lakh crore of credit. From these admittedly crude approximations, it appears that
there is sufficient room for growth of credit even within current definitions and that
there is a fairly severe incidence of under-penetration for these very important sectors
of the economy. Unless more carefully done research produces numbers that are very
different from these approximations, there appears to be no case to relax and broaden
the PSL definitions in the context of the current PSL guidelines.
In this context it is interesting to note that despite the many years of focus on
agriculture overall as a sector it has not crossed even the very low financial depth
threshold of 50 per cent Credit to GDP. Agricultural GDP in India is about Rs. 13 lakh
crore. Achieving the 18 per cent agricultural targets under PSL at the current Net Bank
Credit level would imply a credit number of Rs. 9 lakh crore giving a relatively healthy
sectoral credit-to-GDP of 70 per cent. However, in reality, as mentioned earlier, the
sectoral credit-to-GDP of agriculture is much lower. In addition, over the years, there
is also a disproportionate increase in credit per capita to farmers with large landholdings even though their share in agricultural production is lower.
Figure 4.8.1196
Land-size-wise Credit Outstanding per account (Scheduled commercial Banks' direct finance
to farmers - short term and long term loans) (in Rs.)
160,000
140,000
120,000
Up to2.5
Acres
60,000
Above2.5
acres to 5
Acres
Above5
Acres
40,000
Total
100,000
80,000
20,000
-
This is also corroborated by the continued prevalence of informal indebtedness among
farmers - AIDIS (2002) reveals that non-institutional sources account for almost 40 per
cent of borrowing by cultivator households. In fact only 14 per cent of the marginal
farmers (with land holdings less than 1 hectare) were taking institutional credit in
2009, with the remaining largely relying on informal sources of credit for their credit
needs197. It could well be the case that low credit penetration is one of the important
factors responsible for the rapid decline in the share of agriculture, despite the
involvement of such a large part of the rural populace in this activity.
2. Some PSL delivery models depend on lending through real sector intermediaries such
as fertiliser dealers and sugarcane companies. While these channels do offer a
measure of convenience to the bankers, they also run the risk of tying the hands of the
farmer and leading to malpractices such as over-consumption of inputs like fertilisers
and pesticides, over-pricing of inputs, and under-pricing of produce. Moreover these
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Credit: Priority Sector Lending
non-financial channels are not bound to follow the customer protection guidelines
applicable to the financial sector. These channels therefore represent at best a stopgap arrangement and there is a need for formal financial sector channels to emerge
that are capable of dealing with this customer base directly. Accordingly, it is
consistent for PSL guidelines to encourage this shift by not making lending through
real-sector intermediaries eligible for PSL. Similarly, lending to real-sector
intermediaries has also been removed from the eligible list in the last change of PSL
guidelines. This is consistent with the objectives of directing credit towards segments
that experience the most credit rationing. Several real-sector intermediaries are highly
rated companies and should have no constraints in accessing credit from Banks outside
the PSL framework.
3. Direct Agriculture lending targets, in the manner in which they are currently defined,
appear however, to be biased against landless agricultural labourers as well as
marginal farmers who self-supply labour. The sole factor of production available to the
landless labourer is her own labour. In order to maintain this factor of production (selfsupplied labour), she has to spend on health, food, life insurance and disability
insurance premiums, and other critical consumption items throughout the year. In
order to meet these needs, due to the seasonality of farm incomes, she will necessarily
have to borrow to manage expenses particularly during the agricultural off-season.
However such borrowing by a landless labourer does not qualify under Direct
Agriculture and is viewed as financing consumption expenditure instead of production
expenditure. In direct contrast to this, a medium-farmer who relies on farm equipment
as the main factor of production can borrow to purchase and maintain such equipment
even when it is not being used, and his borrowing is treated as a Direct Agriculture.
This distinction between labour and other factors of production results in landless
labourers systematically facing higher costs of borrowing relative to land-owning
farmers. This difference in costs of borrowing could be between 20-60 per cent
depending on the source of credit. The issue faced by the landless labourer also
persists in the context of marginal farmers who self-supply labour as well as large
farmers using labour-intensive techniques.
The Committee therefore recommends that all loans given to landless labourers and
small and marginal farmers should be counted as a part of Direct Agriculture and not
merely the wages component of a loan given to a farmer for financing her agricultural
production.
Table 4.8.2
Differential Treatment of Landless Labourers under Direct Agriculture Definition
Landless agricultural labourer
Mechanised medium farmer
Income
Agriculture income for 6
Agriculture income for 1 paddy
months, at Rs.100/day =
season
Rs.18,000
= Rs.60,000
Non-agriculture income for 3 Non-agriculture income for 3 months,
months, at Rs.100/day =
at Rs.100/day = Rs.9,000
Rs.9,000
Primary factor of
Own Labour
Farm equipment
production
Borrowing for
Borrowing for food &
Borrowing to maintain farm
maintenance of
healthcare during lean
equipment: Rs.5,000
primary factor of
season: Rs.2,000
production during
off-season
Cost of borrowing
65% p.a. from Money Lender
4% p.a. under Direct Agriculture to
26% p.a. from SHG or MFI
Difference in cost of borrowing: ranges from 61% to 29% p.a.
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4. PSL is currently defined with respect to loans made to various sectors and segments
identified in the guidelines. It also includes investment by banks in securitised assets
and Inter-Bank Participation Certificates where the underlying assets qualify under the
PSL criteria. The Committee recommends the following with respect to PSL
investments:
a. Investment by banks in bonds of institutions must qualify for PSL where wholesale
lending to the same institutions already qualifies under PSL. The fact that loans to
an NBFC-MFI qualify for PSL while bonds do not for the same institution appears to
be an anomaly. Separately there is also a need to ensure that bond and other
investments of banks are permitted to be held in the ―banking book‖ of the bank
based on declared intent and not merely based on source or legal documentation.
b. Credit facilities documented as bonds or Pass-Through Certificates (PTC), whether
originated directly or purchased in the secondary markets should be permitted to
be held in the ―banking book‖ of a bank based on declared intent and not merely
based on source or legal documentation.
c. Investment by banks in RIDF must not qualify for PSL. RIDF investments are
intended only to address non-compliance and also because RIDF proceeds are made
available to State Governments, who, while pursuing important development goals,
are not credit constrained and could raise money from market sources and should
be encouraged to do so instead of crowding out bank lending. Instead, efforts need
to be directed towards ensuring that Banks are able to effectively lend to the
under-banked sectors of the economy.
d. Investment by banks in the form of non-fund based limits (such as guarantees)
should also qualify for PSL to the extent of the credit equivalent amount of the offbalance sheet facility where loans to these categories qualify for PSL. Since a bank
is taking on the risk of this facility and has offered it to the client based on
assessed need, this treatment would appear to be more internally consistent than
excluding such facilities and therefore denying such clients access to non-fund
based facilities. ANBC should also be adjusted to include such PSL-linked, non-fund
based limits.
e. As an added category, within the overall equity investment limits of banks, RBI
could permit equity investments by banks in complementary infrastructure within
the purview of PSL guidelines, such as rural warehouses, market yards, godowns,
silos, and NBFCs in low financial depth districts. Unlike investments in downstream
enterprises, these investments would have the effect of directly contributing to
increased lending to the current PSL sectors and face a severe constraint in the
amount of equity available to them. These equity investments may be included as
a part of the overall priority sector lending targets. They should only be permitted
where debt already qualifies for PSL but with a multiplier of four, to reflect the
higher risk and the illiquid character of these investments. For example, a Rs. 100
crore equity investment in a rural warehousing company by a bank would be
equivalent to Rs. 400 crore of priority sector lending. The benefit must accrue as
long as the equity investment is held by the Bank. This list of eligible equity
investments may be varied from time-to-time and marked to market as per existing
investment guidelines applicable to banks.
Strong Year End Bias in Agricultural Flows
Credit flows to agriculture under PSL display considerable seasonality not explained by
cropping patterns. The Task Force on Credit Related Issues of Farmers, in its report
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Credit: Priority Sector Lending
submitted to the Ministry of Agriculture, Government of India, in 2010, observed that
while month-wise credit disbursement patterns should have been in line with ground level
requirements of Kharif (June, July, September) and Rabi (December, January) seasons,
one-fourth of the disbursements instead happen in March, a month that is not critical to
agriculture production. This is explained by the fact that PSL is a financial year-end target
for banks.
Table 4.8.3198
Percentage Share of All India Month-wise Agricultural
Credit Disbursed
April 2007 to March 2009
2008-09
SCB
Coop
RRB
All
April
1.17
7.99
7.71
2.79
May
2.5
5.95
0.56
2.85
June
5.37
6.18
6.73
5.61
July
6.34
7.87
7.78
6.69
August
4.63
9.45
11.59
5.98
September
9.33
5.43
8.58
8.67
October
5.84
4.94
5.76
5.69
November
7.02
6.84
6.68
6.96
December
11.69
7.72
10.94
11.01
January
10.97
6.44
10.23
10.21
February
11.75
5.9
7.29
10.45
March
23.38
25.28
16.14
23.09
100.0
100.0
100.0
100
All
Considering the fact that a bulk of the PSL lending is focussed in March every year because
there is only a year-end target, the Committee recommends that the current PSL targets
be applicable on the last reporting Friday of the last month of each quarter in exactly the
same manner as it is currently applicable in the month of March, so as to ensure more
timely and continuous credit flow into priority sectors. In order to ensure administrative
ease, requirements such as investment into RIDF can continue to be levied on an annual
basis and computed on the basis of the average of the quarterly requirements. This may at
first glance appear to make it more difficult for banks to achieve their priority sector
targets but on careful examination it is clear that this will in fact make it easier for them
to build a strong and vibrant priority sector business:
1. From a demand side there is nothing particularly significant about the March quarter
relative to the other quarters. Historically this was chosen as the date because in an
environment where banking data was all managed without the use of computers, it
was convenient since it was also the financial year-end. In a Core Banking System
enabled banking environment it is now possible to track these targets, if necessary, on
a daily basis. From a supply side, therefore, spreading out the achievement of these
targets will allow lenders to more closely match demand throughout the year and build
a lending division that is equally active throughout the year and not overly so only at
the year-end.
2. Currently those banks that lend for short-term crops during the Kharif and Rabi seasons
do not get any benefit of that lending for the priority sector target computation since
the crop loans are, for the most part, already repaid by the end of March. This also in
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Credit: Priority Sector Lending
part accounts for the lack of an adequate supply response from the agricultural sector
since credit is not made available in a timely manner. A more continuous lending
programme would address this issue satisfactorily as well as ensure that credit risk is
managed much better.
3. The need of the entire banking system to lend large amounts of credit during a single
quarter end results in undue pressure on interest rates that can be charged and since
the borrowers do not really need the money at that time it also increases the risk of
diversion of funds and therefore of default.
4. The need to maintain a near continuous PSL portfolio outstanding rather than just at
one point during the year will increase the focus of banks on investment credit, since,
unlike crop loans, it has the property that it remains outstanding over a number of
years.
Restrictive interest rate policies, subventions, and waivers on agricultural loans
Banks are required to price farm loans below Rs. 3,00,000 at 7 per cent for which they
receive an interest subvention of 2 per cent in the subsequent period. This pricing is not
consistent with the risk levels associated with loans to agriculture. The principle of
Stability requires banks to price all loans, including agricultural loans, on a sustainable
basis. This stipulation of 7 per cent also violates the RBI guideline that requires banks to
price all loans above their Base Rate. However, the RBI has made a special exemption for
crop loans up to Rs. 3,00,000 and said that banks should charge farmers the interest rates
as stipulated by the Government of India. In case the yield to the bank (after including
subvention) is lower than the Base Rate, such lending will not be construed as a violation
of the Base Rate guidelines199.
In addition, the implementation of the Debt Relief and Debt Waiver Scheme for Small and
Marginal Farmers in 2008 by the Central Government has had serious negative implications
for the banking system since it created the expectation in the minds of farmers that more
such schemes would follow and therefore farm-loans did not have to be serviced regularly.
The Committee is of the view that if the government does desire to provide relief in any
form to the small farmer, it would be best carried out as a direct benefit transfer to the
bank account of the farmer and not through the mechanism of either interest subvention
or debt waiver. This would ensure that the banking system is able to price loans in a
sustainable manner and also protect credit discipline amongst its borrowers. Adding a
universal requirement to report all defaults to credit bureaus would ensure that the
borrower also builds a strong interest in protecting his credit history. Canara Bank for
example recently reported that using CIBIL data there were able to halve the NPA levels
on their retail asset portfolio200.
The Committee also recommends that in order to guard against large scale defaults
resulting from catastrophic events, banks work closely with insurance companies to
purchase bank-wide portfolio level insurance against events such as large scale rainfall
failure on a regional or national basis, instead of having an expectation that relief would
be provided from national or state budgets.
No Market for Sale and Purchase of Agricultural Credit
While a number of other financial markets have evolved in India, including for the trading
of agricultural futures contracts, there has not been any impetus for the evolution of a
market for the sale and purchase of agricultural credit. The Narasimham Committee II
(1998) had recommended in this context that ―As a measure of improving the efficiency
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Credit: Priority Sector Lending
and imparting a measure of flexibility, the Committee recommends consideration of the
debt securitisation concept within the priority sector. This could enable Banks which are
not able to meet their priority sector targets to purchase debt from institutions which are
able to lend beyond their mandated percentage‖.
The absence of this market has meant that each financial institution has had to limit its
origination of PSL loans exactly to the extent of its own deposits and market borrowings
and not originate in excess of their requirements to sell to those institutions that may be
flush with funds but do not have the capability or the confidence to generate an adequate
quantum of PSL loans. This has also inhibited the growth of institutions that may have
origination capability in low financial depth regions but not the liquidity to support it. This
has not only prevented specialisations from building up but also has contributed to the
imbalances in lending to those regions that have not been able to build up their own
banks, as cash rich banks have chosen to focus their lending efforts in regions where they
are already strong such as the Southern and Western regions of the country. As the
discussion on National Banks in Chapter 4.2 reveals, in the absence of such a market,
many banks are being forced to pay large penalties or to originate PSL assets directly even
though in doing so, they are incurring unsustainably high costs and risk-related charges.
The creation of such a market would also enable differentiated banks with different foci
and strategies such as Wholesale Investment Banks and Wholesale Consumer Banks to
contribute actively to supporting the priority sectors. Such markets would also help
naturally concentrated lenders such as Regional Banks (including RRBs, LABs, and
Cooperative Banks) to transfer local systematic risks away from their balance sheets and
thus become structurally stronger. The absence of this market has meant that the only
way to redress concentration risks arising from focussed lending to specific sectors or
regions has been through a broadening of origination strategy forcing them to assume risks
that are inconsistent with their core capabilities.
While currently, RBI guidelines on securitisation are quite enabling vis-à-vis trading of PSL
assets, one specific regulatory barrier is that the all-inclusive interest charged to the
ultimate borrower by the originating entity should not exceed the Base Rate of the
purchasing bank plus 8 per cent per annum. Since such a restriction does not exist on an
asset directly originated by a bank and is also inconsistent with the cap on interest rates
permitted to NBFC-MFIs, this should be removed for securitised assets as well.
Creation of such a market will also enable a broader group of participants in the market
both as suppliers and users of credit. For example, the Food Corporation of India (FCI) and
State Governments can originate warehouse receipts and raise low-cost funds against
these receipts instead of being reliant only on bank credit and crowding out other
borrowers that do not have the ability to access the market directly.
The Committee recommends that the RBI take steps to encourage the creation of such a
market for Agricultural Credit by permitting banks to hold purchased assets within their
banking book on par with assets originated directly by them, based entirely on the
declared intent of the bank and not based on the legal format of the documentation.
The Committee recommends that the RBI remove the stipulation that the all-inclusive
interest charged to the ultimate borrower by the originating entity should not exceed the
Base Rate of the purchasing bank plus 8 per cent per annum. Further, as mentioned in
Chapter 4.5, the RBI should also represent to the Government of India to restore the taxfree status of securitisation SPVs as pass-through vehicles for tax treatment so as to create
pathways for Wholesale Banks to provide liquidity to other Banks and Financial Institutions
directly originating assets in priority sectors.
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Credit: Priority Sector Lending
While a market that trades PSL assets will be of critical importance, the Committee also
recommends that regulation should additionally enable the use of risk-free PSL
Certificates as a means to achieving PSL compliance amongst banks that wish to do so.
Specialisation through Differential Sectoral and Regional Weights
Current PSL strategies require each bank to originate assets in exactly the same manner as
every other bank. While such an approach could be entirely feasible for banks with
universal banking aspirations, it is not well-suited to benefit from the unique capabilities
of more regionally or sectorally specialised banks. For example, rural cooperative banks or
National Banks with a large rural branch network may be better suited to focus their
entire attention on direct agricultural lending while their urban counterpart would do well
to concentrate only on lending to small businesses. This has meant that not only are the
banks as a whole not achieving their PSL targets, particularly to key sectors such as
agriculture but are also experiencing a very high incidence of loan losses.
Year
2009-10
2010-11
2011-12
Table 4.8.4201
NPAs of Banks; Priority and Non-priority Sector Comparison
Priority Sector
Non-priority sector
Overall
Agriculture
MSE
GNPA
Adjusted
GNPA202
3.2%
2.2%
3.7%
1.6%
2.1%
3.6%
3.3%
3.4%
1.4%
1.9%
4.3%
4.3%
3.9%
1.9%
2.6%
An alternate way of achieving the same overall goals would be to not impose a uniform
sectoral allocation on each and every bank but instead to reflect the importance of a
particular sector through an adjustment factor and replace the current 40 per cent PSL
requirement with a 50 per cent Adjusted PSL (APSL) requirement. Banks could achieve
their APSL requirement either by concentrated origination in a sector of their choice or
through market purchases of qualified assets. The sector weightages can be derived every
three years on the basis of relative shortfalls in achievements by banks. This is illustrated
below:
Table 4.8.5
Sectoral Shortfalls for PSL
Public Sector
PSL in 2013
Banks
Agriculture (%)
15.0
MSE (%)
13.7
Weaker Sections (%)
9.8
Total PSL (%)
36.3
Total PSL outstanding (Rs lakh crore)
12.8
Total shortfall in PSL (%)
3.7
Total shortfall in Agriculture (%)
3.0
Total shortfall in MSE (%)
Total shortfall in Weaker Sections (%)
0.2
Overall Banking Sector Shortfall in Agriculture (%)
Overall Banking Sector Shortfall in Weaker Sections (%)
Private
Sector Banks
12.8
16.1
5.7
37.5
3.3
2.5
5.2
4.3
Target
18.0
10.0
40.0
3.4
1.0
According to the relative shortfalls seen in the above, sectors like Agriculture and Weaker
Sections may receive higher weightages than export. Even within agriculture, Direct
Agriculture would receive a higher weightage, while Indirect Agriculture would not, based
on the difficulty banks face in specifically achieving their Direct lending targets. There is
evidence203 to show that credit deepening in the indirect finance category has been much
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Credit: Priority Sector Lending
more pronounced than in the direct finance category. Based on the data in Table 4.8.5,
the weightages for Direct Agriculture and Weaker Sections are calculated depending on
the extent of underachievement relative to the target; all other sectors do not have subtargets and it is not obvious that banks find it difficult to lend to these sectors. The
following multipliers for investments in different PSL sectors are proposed for the FY 201415 to FY 2016-17 period:
PSL Sector
Direct Agriculture
Weaker Sections
Other Sectors
Table 4.8.6
Sector Multipliers for PSL
Target
13.5%
10.0%
16.5%
Extent of
Achievement
74.5%
89.9%
100%
Multiplier
1.25
1.10
1.00
As the scheme in Table 4.8.6 indicates, Rs.1 lent by a bank for direct agriculture (or 1 per
cent of Net Bank Credit) would be multiplied by a factor of 1.25, and the Adjusted PSL
achievement would be equal to Rs. 1.25 (or 1.25 per cent of Net Bank Credit). The
objective of this design is to incentivise banks and others to lend to sectors that are
severely starved for credit and to build specialisations in those sectors.
In addition to the shortfalls associated with the credit flows to specific sectors, there also
exist large regional disparities both in the total quantum of credit disbursed by the
banking system as well as for each sector. During the 11th Five Year Plan204, 37.6 per cent
of agricultural credit was disbursed in Southern India, which accounts only for 18.7 per
cent of India‘s gross cropped area. On the other hand, Eastern India received only 7.3 per
cent of agricultural credit with 14.7 per cent of gross cropped area and Central India
received only 13.2 per cent of agricultural credit with 27.2 per cent of gross cropped area.
To address this regional disparity, there is a need for differential regional multipliers that
will value Rs. 1 invested in a credit starved district more than in a district well-penetrated
by credit. These differential multipliers for districts are constructed based on an
objectively measured index of financial inclusion - Inclusix published by CRISIL205. The
index provides a score out of 100, with 100 indicating a fully financially included district.
Scores in the index range from 96.2 for Pattanamthitta district in Kerala to a low of 5.5 for
Kurung Kumey district in Arunachal Pradesh. A raw district weightage for each district is
calculated based on the distance of the score for that district from that of the best
performing district, i.e., the worst performing district would have the highest weightage.
However, in order to ensure that the district weightages do not become too high, they
need to be damped down by a factor which ensures that the district with a CRISIL Inclusix
score of 50 gets an APSL of 50 per cent for achieving 40 per cent ANBC in PSL. Based on
the data, Faridkot (Inclusix Rank: 141, Score: 50) in Punjab is the district for which
achieving 40 per cent ANBC should yield a APSL of 50 per cent. By adjusting for this, the
damping factor is obtained, which is applied to the raw district weightages. Table 4.8.7
illustrates the damped district weightages and the PSL sector weightages, which together
yield the district-sector combination weightages that will need to be applied to the PSL
portfolios to calculate APSL.
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Credit: Priority Sector Lending
Table 4.8.7
Matrix of Sector and District Weightages
CRISIL
Inclusix
Rank
1
100
141
200
300
400
500
600
632
District
Pattanamthitta
(Weightage: 1.0000)
Namakkal
(Weightage: 1.1069)
Faridkot
(Weightage: 1.1239)
Rajkot
(Weightage: 1.1409)
Muzaffarnagar
(Weightage: 1.1658)
Birbhum
(Weightage: 1.1804)
Nabarangapur
(Weightage: 1.1939)
Paschimi Champaran
(Weightage: 1.2114)
Kurung Kumey
(Weightage: 1.2449)
Direct Agriculture
(Weightage: 1.25x)
Weaker Sections
(Weightage: 1.1x)
Other Sectors
(Weightage: 1x)
1.250
1.100
1.000
1.3887
1.2190
1.1069
1.4100
1.2377
1.1239
1.4313
1.2565
1.1409
1.4625
1.2838
1.1658
1.4808
1.2999
1.1804
1.4977
1.3147
1.1939
1.5197
1.3341
1.2114
1.5617
1.3709
1.2449
Based on this analysis, it emerges that Rs. 1 invested in Direct Agriculture in
Pattanamthitta district (Rank: 1) yields an APSL of Rs. 1.25, while if it were invested in
Kurung Kumey district (Rank: 632), it would yield an APSL of Rs. 1.56. Depending on the
sector and the district that different PSL investments are made in, the overall APSL for the
portfolio is calculated.
It must however be noted that the APSL is designed to be an incentive for institutions to
go into more difficult-to-do regions and sectors, as well as to promote greater
specialisation; it is not meant to be a disincentive for banks from lending in more better
covered regions and sectors. As is clear from the design, each Rupee invested into PSL
anywhere in India, in any sector, yields an adjusted value of at least 1, there is no penalty
for operating in ―easy‖ regions and sectors. What the APSL design instead offers is the
choice of going to more excluded regions and sectors to get the benefits of increased
weightages.
As an illustration, three different banks could choose three completely different strategies
to fulfil PSL obligations based on their specialisations and strengths:
1. Bank 1 follows a strategy to lend 40 per cent of ANBC to the sectors and sub-sectors in
proportions defined in the PSL guidelines and lends to a number of districts above and
below the middle score district, which yields an APSL of 50 per cent.
2. Bank 2 focuses all of its lending in Direct Agriculture to be done equally among all
districts, so as to get an overall weightage benefit (sectoral and regional combined) of
1.45. Such a strategy will need the bank to lend only 34.5 per cent of its ANBC to
reach its 50 per cent adjusted PSL requirement. If, however, the bank were to focus
all its Direct Agriculture lending to top ranked district, it would need to lend 40 per
cent of its ANBC to get to an APSL of 50 per cent, while, focusing only on Direct
Agriculture to the bottom ranked district would require it to lend 32 per cent of ANBC.
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Credit: Priority Sector Lending
3. Bank 3 focuses all of its lending on SMEs in the major Indian cities, thereby foregoing
any sectoral weightage benefit, but gaining some regional benefit, yielding an overall
weightage of 1.16. In this case, so as to reach the APSL target of 50 per cent, the bank
will need to lend 43.2 per cent of its ANBC to SMEs.
The Committee recommends that the RBI revise the PSL targets and require banks to meet
an Adjusted PSL target of 50 per cent against the current requirement of 40 per cent of
ANBC. The adjusted sectoral and regional weights to be used in computing the APSL for
the three year period from FY 2014-15 to FY 2016-17 are specified in Annexure A.
A Fresh Examination of the PSL Framework
While the banking sector in India has grown substantially since the 1970s, the size of the
banking sector in India is still inadequate to meet all the needs of the real economy. This
is evident in the low financial depth ratio and the concentrated nature of balance sheets
of banks. These data point to the real possibility that in a completely deregulated
environment, there might not be adequate flows to sectors of the economy that have a
particular importance, even if they are credit-worthy and can be served profitably. In
order to ensure that India exhibits balanced growth and uses its scarce banking system
resources in a manner best suited to the needs of the economy it therefore becomes
necessary to ―nudge‖ the system towards these sectors. The definition provided in the
Narasimhan Committee Report I (1991) suggests that directed credit policies in India have
fundamentally aimed to extend bank credit to under-banked regions as well as sectors
that are deemed important to national growth and otherwise neglected sectors. All of this
builds the rationale for a continuation of a priority sector lending policy until the overall
financial system acquires enough depth so that no critical sector of the economy or region
of the country is so starved of access to finance that it eventually starts to exert a
deleterious influence on the growth of the entire economy and weakens its ability to
address the challenges of deep seated underdevelopment in those parts.
However, the basis of the total quantum of PSL obligations and how that is allocated
across various sectors is not clear and appears to be lacking any dynamic features. As a
consequence, even though the structure of the economy has changed quite dramatically,
the priority sector requirements have remained essentially unaltered for four decades,
since they were first specified in 1974.
Currently, priority sectors include agriculture, which has historically contributed a major
portion to India‘s GDP; weaker-sections, which represent the most marginalised groups in
society; and housing and education, which are deemed to require investment for creating
long-term social benefits. However, since its inception, the scope of priority sector has
been widened to include more and more sectors. For instance, since the 1970s there have
been several additions to the sectors covered under directed bank credit – infrastructure,
retail traders, small businesses, and education (1970) and the addition of a sub category of
weaker sections (1980). These additions have been frequently modified and even repealed
in the subsequent years. This apparent lack of any particular pattern strongly suggests
that there is a need to closely examine the fundamental design of the PSL program and its
designated sub-targets for different sectors in order to ensure that indeed the sequestered
resources are being put to the best possible use and serving the purpose for which they
were originally intended. For example, the logic for higher education loans being reckoned
as PSL and primary education loans not being eligible is not clear. There are also
inadvertent biases that have gotten created in PSL definitions. The issue of labourers and
marginal farmers versus mechanised farmers was discussed earlier. Another concern is the
bias towards ownership housing and not rental housing by making home loans up to a
specific amount eligible for PSL.
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Credit: Priority Sector Lending
In order for PSL targets to automatically reflect the needs of the underlying economy, the
Committee recommends that since in accordance with its vision, each ―significant‖ sector
or sub-sector (with more than a 1 per cent contribution to the GDP) of the economy should
achieve at least a 50 per cent credit to GDP ratio (financial depth) in order to ensure that
the absence of finance is not retarding its growth, the difference between actual financial
depth and this 50 per cent goal should determine the weight assigned to it.
The Committee also recommends that since, in accordance with its vision, each district of
the country should achieve at least a 50 per cent credit to GDP ratio (financial depth) in
order to ensure that the absence of finance is not retarding its growth, the difference
between actual financial depth and this 50 per cent goal should determine the weight
assigned to it. The table below gives the weights that are assignable to each sector of the
economy using this approach.
For the illustration below, only the three main sectors of the economy have been used
(agriculture, manufacturing and services), and two customer segments (sub-sectors) under
each of the sectors. A deeper exercise with accurate district GDP data206, more granular
sectors and detailed customer sub-segments would be required to design a more precise
mechanism for PSL.
Table 4.8.8
Illustrative Region - Sector – Customer Segment Matrix for APSL
Sector
Customer
Segment
SectorSegment
Credit to
GDP ratio
SectorSegment
Weightage
District
Nicobar
Karimnagar
Raigarh
North Goa
Karnal
Bengaluru Urban
District
Credit to
GDP
ratio
1.8%
District
Weightage
Agriculture
Margi
nal &
Small
Medium
and
Large
44.9%
1.05
Industry
Services
MSME
Large
MSME
Large
26.4%
55.7%
101.0%
25.3%
42.6%
1.24
1.00
1.00
1.25
1.07
REGION-SECTOR-CUSTOMER SEGMENT MATRIX FOR
APSL
1.48
1.558
1.832
1.482
16.6%
1.33
1.402
1.649
1.334
26.0%
36.1%
45.8%
118.9%
1.24
1.14
1.04
1.00
1.304
1.197
1.095
1.051
1.533
1.408
1.288
1.236
1.240
1.139
1.042
1.000
1.482
1.334
1.240
1.139
1.042
1.000
1.848
1.592
1.664
1.433
1.546
1.420
1.299
1.247
1.332
1.224
1.119
1.074
To reiterate, a comprehensive measure to assess the sectors and regions eligible for PSL
would be built on two broad parameters:
1. District level Credit Depth
2. Sector and sub-sector level Credit Depth
The Committee recommends that RBI seriously examine moving to a new framework in
which two parameters: District level credit depth, and sector and sub-sector level credit
depth be used to determine the sector, sub-sector, and regional weights which are
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Credit: Priority Sector Lending
published every three years. Using these weights banks would be required to reach an
adjusted PSL target of 150 per cent of ANBC.
Recommendations
4.28
All loans given to landless labourers and small and marginal farmers should be
counted as a part of Direct Agriculture and not merely the wages component of a
loan given to a farmer for financing her agricultural production.
4.29
Investment by banks in bonds of institutions must qualify for PSL where wholesale
lending to the same institutions already qualifies under PSL.
4.30
Credit facilities documented as bonds or Pass-Through Certificates (PTC), whether
originated directly or purchased in the secondary markets should be permitted to
be held in the ―banking book‖ of a bank based on declared intent and not merely
based on source or legal documentation. [Identical to Recommendations 4.1(b) and
4.10]
4.31
Investment by banks in the form of non-fund based limits (such as guarantees)
should qualify for PSL to the extent of the credit equivalent amount of the offbalance sheet facility where loans to these categories qualify for PSL. ANBC should
also be adjusted to include such PSL-linked, non-fund based limits.
4.32
Equity investments by banks in complementary infrastructure within the purview of
PSL guidelines, such as rural warehouses, market yards, godowns, silos, and NBFCs
in low financial depth districts. These equity investments should be eligible for
contribution to the overall priority sector lending targets. They should be
permitted where debt already qualifies for PSL but with a multiplier of four, to
reflect the higher risk and the illiquid character of these investments. The benefit
must accrue as long as the equity investment is held by the Bank. This list of
eligible equity investments may be varied from time-to-time. [Identical to
Recommendation 4.44]
4.33
PSL targets should be applicable on the last reporting Friday during the last month
of each quarter in exactly the same manner as it is currently applicable in the
month of March, so as to ensure more timely and continuous credit flow into
priority sectors. In order to ensure administrative ease, requirements such as
investment into RIDF can continue to be levied on an annual basis and computed on
the basis of the average of the quarterly requirements.
4.34
If the government does desire to provide relief in any form to the small farmer, it
would be best carried out as a direct benefit transfer (DBT) to the bank account of
the farmer and not through the mechanism of either interest subvention or debt
waiver. This would ensure that the banking system is able to price loans in a
sustainable manner and also protect credit discipline amongst its borrowers.
Adding a universal requirement to report all defaults to credit bureaus would
ensure that the borrower also builds a strong interest in protecting his credit
history, even if he is a recipient of DBTs. [Similar to Recommendations 4.2 and
4.43]
4.35
In order to guard against large scale defaults resulting from catastrophic events,
banks should be permitted to work closely with insurance companies to purchase
bank-wide portfolio level insurance against events such as large scale rainfall
failure on a regional or national basis, instead of having an expectation that relief
would be provided from national or state budgets.
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Credit: Priority Sector Lending
4.36
For the provision of food-credit, Food Corporation of India (FCI) and State
Governments should be required to originate warehouse receipts and raise low-cost
funds in the market against these receipts instead of being reliant only on bank
credit. [Identical to Recommendation 4.46]
4.37
The stipulation that the all-inclusive interest charged to the ultimate borrower by
the originating entity should not exceed the Base Rate of the purchasing bank plus
8 per cent per annum should be removed. [Identical to Recommendation 4.9]
4.38
The RBI should represent to the Government of India to restore the tax-free status
of securitisation SPVs as pass-through vehicles for tax treatment so as to create
pathways for Wholesale Banks to provide liquidity to other Banks and Financial
Institutions directly originating assets in priority sectors. [Identical to
Recommendation 4.11]
4.39
While a market that trades PSL assets will be of critical importance, regulation
should additionally enable the use of risk-free PSL Certificates as a means to
achieving PSL compliance amongst banks that wish to do so.
4.40
In order to enable greater regional and sectoral specialisation among Banks, the
Committee recommends that the RBI revise the PSL targets and require banks to
meet an Adjusted PSL target of 50 per cent against the current requirement of 40
per cent. Districts and sectors are weighted based on the difficulty in lending to
them, and a Bank lending to a difficult sector in a difficult to reach district can
benefit from a multiplier value based on the specific sector and district. Every
sector-district combination has a weight associated with it and the Bank will have
to reach an adjusted PSL value of 50% taking these weightages into account.
4.41
The Committee recommends that RBI seriously examine moving to a new
framework in which two parameters: District level credit depth, and sector and
sub-sector level credit depth be used to determine the sector, sub-sector, and
regional weights which are published every three years. Using these weights banks
would be required to reach an Adjusted PSL target of 150 per cent of ANBC.
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Credit: Complementary Infrastructure
Chapter 4.9
Complementary Infrastructure
In order for credit to be delivered in a sustainable manner and for it to be distributed in
an equitable manner across regions, there are several elements of complementary
infrastructure that need to be encouraged. This Chapter discusses some of the important
elements of complementary infrastructure including:
a. Customer Data Architecture
b. Warehousing Infrastructure
c. Land Registries
d. Weather Stations
e. Registries for Movable Collateral
f. Development of second-hand asset markets
Customer Data Architecture
Robust customer data architecture is critical infrastructure for financial deepening in the
country. In particular, it enables Banks to extend their outreach beyond physical branch
networks. A large number of borrowers lack access to formal credit since they do not have
acceptable forms of collateral or verifiability of income. These borrowers consequently
don‘t have formal credit histories or payment histories, which further limits their ability
to access formal credit. Such borrowers are called ‗thin-file‘ borrowers in the credit
reporting world. The following steps can be taken to ensure that such customers can build
credit histories over a period of time:
1. Use of Alternative or Non-Traditional Data: Most borrowers, the poor included, have
alternate payment history track records that do not include making repayments on
formal loans or credit. This could be the payment of utility (water, gas, telephone,
cable) bills, rentals, and instalment payments for consumer goods and appliances,
which occur on a recurring basis. These recurring payments provide an alternative
method of tracking payment behaviour for potential borrowers. For instance, the
Italian credit bureau, CRIF, set up a credit scoring model, the ―water score,‖ which
took up to 3 years of payment of water bills into consideration. More than 83 per cent
of water customers who previously had no credit history now have a positive one
thanks to paying their water bills, which made it easier for them to obtain credit.
The most significant example of a service with far-reaching impact is that of mobile
service providers. Mobile service providers operate in virtually every economy today,
and serve large segments of the population in these economies. Mobile phones have
deep outreach and penetrate the poorest segments of the population – those without
access to basic amenities, or regular phones/landlines. Mobile service providers are,
therefore, natural collectors of information on the entire range of financial clients
(including the unbanked), and are likely participants in credit reporting systems.
Such non-traditional or alternative data allows lenders to make more reliable
assessments of applicants that have sparse ―formal‖ credit histories, and increase
access to credit to those that are typically left out of formal lending channels. For
example, a 2006 study by the Policy and Economic Research Council (PERC) in the
United States, that looked at 80 lakh thin-file consumer records held by a mainstream
credit bureau in the United States, found that including non-traditional data increased
acceptance rate (by 10 per cent in the case of energy utility data and 9 per cent in the
case of telecom data). With the introduction of alternative data, a larger per cent of
the thin-file population became score-able (using traditional lending models). In a oneyear observation period, the study found that 16 per cent of thin-file borrowers whose
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Credit: Complementary Infrastructure
credit report included alternative data had opened a new credit account as compared
with 4.6 per cent of thin-file borrowers whose credit report did not include alternative
data.
2. Use of Big Data: The use of transactional data such as mobile minutes, top-ups, and
Voice and SMS usage to create scoring models that predict consumer behaviour
presents the next frontier in credit scoring. This new set of data can be a lot richer
and more voluminous. For example, a mobile account may generate hundreds or even
thousands of calls and text messages per month, each carrying a rich data set that
includes when the call was made, the location of the caller at the time of the call,
who received the call, the type of information accessed via text messaging, and the
types and number of payment transactions made through the device.
However, big data is more than financial data or mobile data. It includes all types of
digital data that can be studied and analysed to construct the profile of an individual
and provide tailored products and services catering to this individual. Several start-up
companies have emerged around the globe that use social data feeds (like Twitter,
Facebook, LinkedIn) to develop credit profiles and scores of people that are not
traditionally banked, and offer credit to them.
One example is Cignifi, a start-up that partnered with Oi Telecom, Brazil‘s largest
telecom operator, to develop a pilot scorecard using consumer call data records that
would predict creditworthiness of low-income borrowers in Brazil‘s poorest region.
Specifically Cignifi worked with data of Oi Telecom‘s ‗Oi Paggo‘ product which
provided pre-pay customers with a credit card delivered entirely through their mobile
phone. Oi Paggo was looking for ways to improving its risk assessment of pre-pay
customers, the majority of whom did not have formal credit histories, to reduce loan
loss rates and improve uptake of the product. Cignifi used call data records (CDR) of 27
lakh pre-pay mobile consumers in 21 cities in north-east Brazil specifically looking at
detailed calls, SMS, and top-up activity. The scoring model they built was back tested
against loan and payment data from a portfolio of 40,000 virtual credit cards issued to
a set of those same customers by Oi Paggo. Cignifi was able to develop a scorecard
that provided Oi Paggo a comprehensive underwriting strategy for targeting lowincome consumers in a profitable manner while limiting risk exposure. Cignifi analysis
showed that if Oi Paggo had used their scorecard during preapproval and underwriting,
they would have approved 24 per cent net new customers and reduced default rate in
its portfolio from 12 per cent to 9 per cent. Even though big-data related
developments are at a nascent stage in India, creating robust customer data
architecture will be a critical complementary infrastructure for financial deepening in
the future.
3. Credit Bureaus to cover all credit institutions: With the integration of microfinance
borrowers into main stream credit reporting, a larger segment of the borrowing
population (around 2.5 crore microfinance loan records are uploaded monthly on the
credit bureaus) is being included in the coverage of bureaus. However, to play a more
effective role in inclusion, credit bureaus will eventually have to cover all credit
institutions including banks, cooperatives, and NBFCs. There is an urgent need for
credit bureaus to tap into such sources of credit information in order to build credit
histories of people. The regulator should require that all loans by regulated institutions
should be reported to at least one credit bureau.
4. Expand list of specified users for Credit Bureau data: The Credit Information
Companies Act (CICA), 2005 provides for specified users, notified by the RBI, who can
get access to bureau data. The list of specified users, as well as non-credit
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contributors needs to be expanded as India gains experience with credit information.
Extant regulations denote cellular and phone service providers (amongst others) as
specified users. However, while these entities are not ‗banking companies‘ and are
therefore not mandated to share data with the bureaus, they are allowed to access
bureau data in making decisions relevant to their activity. Good practice credit
reporting systems generally operate on the principle of reciprocity207, whereby a data
provider would only be allowed to access credit bureau data if it had provided its own
data to the bureau.
In this context, customer data protection assumes great importance. India needs to
move to a system where any person having a written authorisation of the borrower or
entity on whom information is being sought, ought to be able to have access to the
credit records in question, with only the truly necessary safeguards. Among potential
users should include a prospective employer, landlord, or creditor, whether bank or
non-bank. One of the best ways to limit unauthorised use of credit information is to
develop systems, which record all queries for an individual‘s report. Consumers can
review this information if they think their data has been used in an inappropriate
manner. This simple reporting tool can greatly help to detect misuse of the data by
lenders and others who may request this information, as well as by staff of the credit
reporting firm.
5. Incentives to ―Clean Up‖: Procedures should be in place to facilitate challenges to
erroneous data. Consumers should be able to review their reports and identify
reporting errors via the Internet and by phone. It is particularly important that
consumers have access to reports when an adverse action has been taken. Clear
procedures should be established in regulations specifying the steps in the dispute
resolution process and the time that credit reporting firms have to verify and respond
to complaints. International best practice is to establish time limits on the length of
the credit history available to a potential lender. Economic research shows that recent
credit payment record is of most relevance for predicting future default. Moreover,
the fact that after a certain period of time, information, especially regarding defaults,
will not be distributed to lenders creates additional incentives for the borrower to
improve credit repayment behaviour and to ‗clean up‘ the record. For example,
records are available only for 5 years in Australia, Brazil, Germany, Ireland, Peru, and
Spain, and for 7 years in the US, and Mexico.
6. Ownership of Customer Data: There is a need to develop a robust legal and regulatory
framework around customer data generated in various transactions (payments and
credit, digital and off-line), with the objective of customer ownership of their own
transactions data and its use for signalling credit-worthiness. One approach to this is
the architecture developed by companies like Idcubed.org who have an open source
software that can be built as standard into every smartphone, tablet and wearable
digital device that allow users to own their data through a highly secure ‗core
identity‘, which makes it harder for the state and companies such as Google and
Facebook to scrape private data for their own ends. The availability of such a 'lock box'
of data, authentication and 'priming' by the phone vendor, and employer requirement
to 'log in' such authentication, provide alternative approaches to developing an
architecture that enables use of data while respecting individual rights. In countries
where a separate data protection authority or privacy commissioner exists, all data
providers/users of a credit reporting system would fall under the purview of this
authority, since the authority‘s reach extends across sectors and thus overcomes some
of challenges associated with overlapping regulatory boundaries. In Australia and New
Zealand for instance, the respective Data Privacy Commissioner is responsible for
regulating all entities participating in the credit reporting system and ensuring their
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compliance with the respective credit reporting legislations. Data protection is still
largely in its infancy in India, although privacy is afforded through several acts, like
the Information Technology Act of 2000, Information Technology (Reasonable Security
Practices and Procedures and Sensitive Personal Information) Rules 2011 (IT RSPPSPI
Rules), the Indian Constitution, to name a few. As the data landscape evolves in India,
it becomes critical that a cogent framework for data protection is developed.
Warehousing Infrastructure:
Warehouse receipts finance can play an important role in smoothing income for farmers by
providing liquidity against the harvested commodity. When delivering the product to an
accredited warehouse, the farmer obtains a Warehouse Receipt that can be used as
collateral for short-term borrowing to obtain working capital. The Rajan Committee (2009)
estimated that this had the potential to inject over Rs. 1 lakh crore of agricultural credit,
based on a projection that at any time, about 15–20 per cent of the annual agricultural
produce is stored in warehouses.
With the promulgation of the Warehousing (Development and Regulation) Act, 2007,
warehouse receipts have become negotiable instruments. They offer reliable form of
collateral in the agricultural sector. Warehouse receipts can be in physical or electronic
form and must be issued by registered warehouses, which will be accredited by the
Warehousing Development and Regulatory Authority. The warehousing capacity available
in India, in public, cooperative and private sector is about 11.24 crore MTs (Table
4.9.1208).
Table 4.9.1
Warehousing Capacity in India
#
Name of the organisation /Sector
Storage Capacity (in
Crore MT)
1.
Food Corporation of India (FCI)
3.36
2.
Central Warehousing Corporation (CWC)
1.01
3.
State Warehousing Corporations (SWCs)
2.30
4.
State Civil Supplies
1.13
5.
Cooperative Sector
1.54
6.
Private Sector
1.90
Total
11.24
The storage space available in the country is not sufficient to cater to the procured
stocks. As a result, substantial quantity of food grains (wheat) is stored in Covered and
Plinth (CAP), an open storage system. For instance, in the Rabi Marketing Season (RMS)
2012-13, the Food Corporation of India (FCI) had procured 3.8 crore tonnes of wheat which
was around 1 crore tonnes higher than the earlier record procurement.
Land Registries:
A critical barrier to financial access is the frequent inability of small and informal
borrowers to secure loans with collateral, often a necessary condition for participation in
formal credit markets. One frequently cited contributing factor is the fact that in much of
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the developing world a large percentage of both rural and urban property is untitled 209. In
Peru, introduction of land titling was associated with a 9-10 percentage point increase in
loan approval rates from the public sector bank for housing construction materials, while
there appears to be no effect on the loan approval rate of private sector lenders.
However, conditional on receiving a loan, private sector interest rates are an average of 9
percentage points lower210 for clients with a clear title to their land.
As per Indian law, while the compulsory registration of sale of land and property is
mandated, the Registration Authority does not need to verify the history or ownership of
the property from the seller. The deeds registry simply gives public notice of a transaction
and does not imply any inference about the legal validity of the transaction or that the
parties were legally entitled to carry out that transaction. Therefore, land registration
does not mean registration of title of land; it is only a deed of transaction. This
considerably weakens the protection offered by the system to property holders.
Considering the multiple gaps in the present system of land registration, the Government
of India needs to lead an urgent initiative to establish the legal and institutional
framework aimed at establishing a transparent and streamlined process for surveying,
recognising, validating, registering, issuing and guaranteeing land titles. Several State
Governments including Rajasthan and Andhra Pradesh have taken the lead in moving
towards this approach.
It has been recommended by the Working Group on Partnerships for Land Title
Implementation in Urban Management (PLATINUM) 211, that the long-term solution to the
issue of land titling will require State Governments to constitute Land Titling Authorities
(LTA), which will undertake surveys of all lands and issue title certificates after
undertaking the required enquiries and maintain registers of titles issued. It may also
administer a system of indemnification of the titles issued against errors. For this purpose,
the Authority could constitute specialised divisions working under its control and
supervision.
In a guaranteed land title registration system, the title register shows the accurate legal
situation of the land and therefore removes the need for retrospective examination of
title and maintenance of deeds. This system is based on three basic principles:
1. Curtain: There is no requirement of further proof of ownership beyond the Title
Certificate and the entry in the title registry of the LTA. The LTA will maintain an
accurate and updated Title Register of all land through a system of Unique Property
Identification Numbers (UPIN). Any conveyance registered with the Stamps and
Registration Department is updated in the LTA‘s Title Registry, and a fresh title is
issued by the authority indicating all the changes in the title.
2. Mirror: Under this principle, the LTA ensures that what is shown on the title certificate
reflects the ground reality. The LTA will survey, geo-locate and allocate UPINs to land
parcels before the first title is issued.
3. Indemnity: The title is guaranteed by the State Government to the title holder and any
legitimate counter claimant is indemnified against loss by the government. The land
Tribunal will hear appeals against orders of the Authority and adjudicate on them.
This approach has also been endorsed by the Rajan Committee (2009) and offers a
systematic long-term path to land titling. However, considering the fact that land is a
subject in the State List of the Constitution, the establishment of a nation-wide system
that guarantees land titles is bound to be a long process. As interim measures that pave
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the way for creation of guaranteed land titling system, the immediate steps outlined by
the Rajan Committee (2009) were:
1. Full Computerisation and Integration of land records: Government measures to
encourage computerisation could include:
a. Clarifying the policy and establishing clear criteria and accountability mechanisms
for allocation of central funds on this;
b. Identifying and publicising best practices on technical and legal issues and
promoting exchange and communication among technical staff across states; and
c. Prioritising full functional integration between records and registry.
2. Full cadastral mapping of land: An important problem is that existing cadastral survey
records are largely limited only to agricultural land. The inhabited portions of villages,
as well as towns and cities, have largely remained un-surveyed. Identification of urban
property is, therefore, only by means of description of boundaries. This has to be
remedied. A relatively low cost method to implement basic cadastral mapping is to
combine satellite imagery with existing village maps and other readily available spatial
products.
3. Reduction of stamp duty: All states receiving funds under JNNURM are required to
provide a roadmap for reducing stamp duties to no more than 5 per cent in a definite
timeframe.
4. Compulsory registration of all transactions: A large number of land transactions,
especially in case of succession, do not need to be registered, partly because it is
deemed unreasonable to charge stamp duty on these. Requiring that any change in the
revenue records as a result of succession triggers a corresponding change in the land
registry, without any payment in stamp duty, will go some way in ensuring registries
are complete.
5. Elimination of restrictions on land markets: Widespread prohibition of land leasing is
not consistent with efficient resource allocation. It raises the cost to rural–urban
migration as villagers are unable to lease their land, and often have to leave a family
member (typically the wife) behind to work the land. Lifting these restrictions can
help the landless (or more efficient large land owners) get land from those who
migrate, and allow those who currently lease land informally to formalise their
transactions and thus obtain institutional credit and other benefits.
Weather stations:
One of the ways in which the risk of loss of crop yield on account of adverse weather has
been mitigated in lending to farmers is through the use of a crop insurance protection
linked to the crop loan. Weather based insurance products are designed to provide
insurance protection against losses in crop yield resulting from adverse weather
incidences. For example, the Weather Based Crop Insurance Scheme (WBCIS) provides
payout against adverse rainfall incidence (both deficit and excess) during Kharif and
adverse incidence in weather parameters like frost, heat, relative humidity, and unseasonal rains during Rabi season. The weather index insurance market in India is the
world‘s largest, having transitioned from small-scale and scattered pilots to a large-scale
weather based crop insurance program212. In the 2010-11 agricultural year over 90 lakh
Indian farmers held WBCIS policies with premium volume of over Rs. 1,300 crore and total
sum insured over Rs. 16,000 crore213. For the purposes of compensation, the State
Government notifies a Reference Unit Area (RUA), which is deemed to be a homogeneous
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unit. All the insured cultivators of a particular insured crop in that area are deemed at on
par in the assessment of claims. Each RUA is linked to a Reference Weather Station (RWS),
on the basis of which current weather data and the claims would be processed. Claims
arise when there is a certain adverse deviation in actual weather parameter incidence in
RUA as per the weather data measured at RWS. According to the India Meteorological
Department (IMD), there are 701 departmental hydro-meteorological observatories in the
country. Further, the IMD operates 125 Automatic Weather Stations and 500 automatic
rain gauge stations214. In addition, there are 8,579 non-departmental rain gauge
stations215.
In weather based insurance products, the insured holds the ‗basis risk‘. Basis risk is
defined as the variability in the relationship between the value of losses as measured by a
weather index and the value of losses experienced on the farm by the farmer216. Basis risk
could occur due to spatial variation in weather variables (particularly where there are
local micro-climates) as well as differences in management practices, soil quality or crop
varieties. Because no individualised loss adjustment occurs with weather index insurance,
the policy-holder must always carry the basis risk. Geographic basis risk, which is likely to
arise from the distance between a farmer‘s plot of land and the contractual weather
station, can be reduced by an increase in granularity of weather stations217. Paucity of
weather stations in the country limits demand for weather insurance since the farmer
knows that she holds the risk of receiving no claim payment despite having experienced a
severe crop loss.
Further, ―suggestive evidence of the role of liquidity constraints implies that policies
should be designed to provide payouts as quickly as possible, especially during the
monsoon when measured discounting of future cash flow is high. For example, payouts
from a policy covering the first phase of the monsoon, if paid immediately, could be used
to help fund crop replanting later in the monsoon. In practice to date, payouts are not
made until after the end of the monsoon, in part because of delays in receiving certified
rainfall data from government rainfall stations.‖218 Private entities like ICICI Lombard, for
instance has begun using automated rain gauges that report rainfall immediately. This
allows payouts to be made more quickly, and reduces basis risk by increasing the density
of rainfall stations.
More geographically dispersed weather stations therefore reduce basis risk and increase
the speed and accuracy of weather data. This could lead to a higher take-up of weather
indexed insurance and higher rate of acceptance of weather-indexed contracts by
reinsurers, translating into improved reinsurance rates. According to the Draft Guidelines
for setting up Automatic Weather Stations (AWSs) and Automatic Rain Gauge (ARGs), crops
within a radius of 5 km from a weather station can be insured with a reasonable reduction
in basis risk, while anything beyond 5 km tend to increase the uncertainty. Assuming the 5
km radius, about 40,000 weather stations would be required at the national level to
service weather insurance219. Private entities like ICICI Lombard have started to form
partnerships with National Collateral Management Services Limited (NCMSL) to install
automated weather stations throughout India. Such initiatives need to be strongly
encouraged by the Government. A wide network of weather stations also enables the
growth of the domestic weather risk market and the placement ability of domestically
underwritten weather contracts in the international market.
Registries for movable collateral and development of second-hand markets:
According to World Bank Enterprise Surveys performed in over 100 countries, collateral
was required in over 75 per cent of all loans. Studies have noted that the availability of
collateral remains a binding constraint on financing, and that this constraint binds harder
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in underdeveloped financial markets, where insufficient collateral remains one of the
main reasons firms are rejected when they apply for bank credit220.
Movable assets, as opposed to fixed assets such as land or buildings, often account for
most of the capital stock of private firms and comprise an especially large share for micro,
small and medium-size enterprises. For example, in the developing world, it is estimated
that 78 per cent of the capital stock of businesses is typically in movable assets such as
machinery, equipment or receivables, and only 22 per cent is in immovable property221.
Hence, movable assets are the main type of collateral that firms, especially those in
developing countries, can pledge to obtain bank financing. However, banks in developing
countries are usually reluctant to accept movable assets as collateral due to the
inadequate legal and regulatory environment in which banks and firms co-exist. In this
context, movable assets become ―dead capital‖. For instance, studies have estimated that
nearly 90 per cent of movable property that could serve as collateral for a loan in the
United States would likely be unacceptable to a lender in an underdeveloped financial
market222.
While a sound legal and regulatory framework is essential to allow movable assets to be
used as collateral, registries for movable assets fulfil two key functions:
1. to notify parties about the existence of a security interest in movable property (of
existing liens) and
2. to establish the priority of creditors vis-a-vis third parties
Therefore, without a well-functioning registry for movable assets, even the best secured
transactions laws could be ineffective. A recent study that explored the impact of
introducing collateral registries for movable assets on firms' access to bank finance across
73 countries found that the introduction of registries for movable assets is associated with
an increase in the likelihood that a firm has a bank loan, line of credit, or overdraft; a rise
in the share of the firm‘s working capital and fixed assets financed by banks; a reduction
in the interest rates paid on loans; and an increase in the maturity of bank loans223. In
2007, China enacted the new Property Law which adopted important principles of modern
secured transactions system and it opened up the scope for movables lending (including
receivables), set up a clearer priority rule, and provided a better basis for enforcement. A
modern security interest registry for account receivables was created in October 2007. It
was China‘s first nation-wide, central and internet-based filing system for secured
transactions. The new receivables registry incorporated all the key features of a modern
movable collateral registry such as on-line accessibility to the users and public, user
accounts, notice based registry in which information limited to the creditor, debtor, loan
amount and the description of assets, centralised information, and reasonable fee. As a
result, the total number of commercial loans involving movable assets grew by 21 per cent
per year in 2008-2010. Further, 84 per cent of loans secured with movables (receivables)
went to SMEs. Almost none of the SMEs surveyed had any loans secured with receivables
before the reform.
The Rajan Committee (2009) notes the need for establishing a comprehensive registration
regime. India has a ―system for registration of security interests created by companies
incorporated under the Companies Act, 1956, but there is no registration process
mandated for certain types of security interests created by individuals, partnership firms,
cooperative societies and trusts. Additionally, for certain categories of movable assets,
there are asset specific registration systems in operation, and registration is required in
respect of charges created on such assets irrespective of who holds the asset. 224‖ The
Rajan Committee (2009) pointed to three possible paths to establishing a comprehensive
registration regime:
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Credit: Complementary Infrastructure
1. Using the network of Registrar of Companies and the Ministry of Corporate Affairs‘
―MCA 21‖ e-governance initiative.
2. Using credit information companies (or alternatively, the depository infrastructure—
which serves the capital markets)
3. Using the SARFAESI Act provisions dealing with the registry of security interests: The
Central Registry of Securitisation Asset Reconstruction and Security Interest of India
(CERSAI) was set up under Section 20 of the SARFAESI Act. The object of setting up the
Registration System under Chapter IV of the SARFAESI Act was to create a public data
base about encumbrances created on properties to secure loans and advances given by
the banks and financial institutions, as also transactions of securitisation or asset
reconstruction undertaken pursuant to the provisions of the SARFAESI Act.
A liquid market for second-hand assets increases the ability of banks to do asset backed
lending to small businesses as it serves to minimise loss given default in segments such as
commercial vehicles finance, tractor finance and finance of other farm equipment. The
second-hand asset market is often dominated by brokers and other intermediaries who
have constrained access to finance. Initiatives that increase the transparency and liquidity
of these markets are significant.
Recommendations:
4.42
There is a need to develop a robust legal and regulatory framework around
customer data generated in various transactions (payments and credit, digital and
off-line), with the objective of customer ownership of their own transactions data
and its use, among others, for signalling credit-worthiness. RBI should constitute a
Working Group comprising TRAI, CERC, and Credit Information Companies to
develop a framework for sharing of data between telecom companies, electrical
utilities, and credit bureaus. This framework should be in keeping with the FSLRC‘s
draft Indian Financial Code which recommends the creation of regulations on the
collection, storage, modification and protection of personal information by
financial services providers; and establishment of mechanisms to ensure that
consumers have access to, and are given an effective opportunity to seek
modifications to, their personal information. [Identical to Recommendation 4.8]
4.43
Universal reporting to credit bureaus should be mandated for all loans, both
individual and SME, but in particular SHG loans, Kisan Credit Card, and General
Credit Card. [Identical to Recommendation 4.2]
4.44
Equity investments by banks in complementary infrastructure within the purview of
PSL guidelines, such as rural warehouses, market yards, godowns, silos, and NBFCs
in low financial depth districts. These equity investments should be eligible for
contribution to the overall priority sector lending targets. They should be
permitted where debt already qualifies for PSL but with a multiplier of four, to
reflect the higher risk and the illiquid character of these investments. The benefit
must accrue as long as the equity investment is held by the Bank. This list of
eligible equity investments may be varied from time-to-time. [Identical to
Recommendation 4.32]
4.45
For the provision of food-credit, Food Corporation of India (FCI) and State
Governments should be required to originate warehouse receipts and raise low-cost
funds in the market against these receipts instead of being reliant only on bank
credit. [Identical to Recommendation 4.36]
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Credit: Complementary Infrastructure
4.46
RBI needs to write to each of the State Governments expressing its support for the
recommendations of both the PLATINUM Group and the Rajan Committee (2009)
and urge them to implement those ideas by pointing out the potential benefits to
the expansion of banking and financial activity in their respective states.
4.47
Banks and Financial Institutions should be required to verify the land records of
their clients at the time of making loans and in those states where this is possible,
to insist that transfers take place before a loan can be renewed for a second time.
4.48
Equity investments by banks in private companies engaged in the task of installing
and operating weather stations, or in creating markets for second-hand assets
should be eligible for PSL treatment. These investments should also get a multiplier
of four, to reflect the higher risk and the illiquid character of these investments.
[Also see Recommendation 4.44]
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Recommendations Regarding Credit
Chapter 4.10
Recommendations Regarding Credit
4.1
In order to encourage banks to actively manage their exposures to various sectors,
including priority sectors, a number of steps would have to be taken:
a. Banks must be required to disclose their concentration levels to each segment
in their financial statements.
b. Credit facilities documented as bonds or Pass-Through Certificates (PTC),
whether originated directly or purchased in the secondary markets should be
permitted to be held in the ―banking book‖ of a bank based on declared intent
and not merely based on source or legal documentation. [Identical to
Recommendations 4.10 and 4.30]
c. RBI must represent to the MoF to restore the tax-free status of securitisation
SPVs as pass-through vehicles for tax treatment pointing out the role it would
play in ensuring efficient risk transmission. [Identical to Recommendations 4.11
and 4.38]
d. Banks must be permitted to purchase portfolio level protection against all
forms of rainfall and commodity price risks, including through the use of
financial futures and options bought either within India or globally.
4.2
Universal reporting to credit bureaus should be mandated for all loans, both
individual and SME, but in particular SHG loans, Kisan Credit Card, and General
Credit Card. [Identical to Recommendation 4.43]
4.3
In view of the fact that banks may choose to focus their priority sector strategies
on different customer segments and asset classes, it is recommended that the
regulator provide specific guidance on differential provisioning norms at the level
of each asset class. A bank‘s overall NPA Coverage Ratio would therefore be a
function of its overall portfolio asset mix. On standard assets, provisioning levels as
well as asset classification guidelines specified by RBI would need to reflect the
underlying level of riskiness of each asset class (combination of customer segment,
product design, and collateral) and not be uniform across all the asset classes.
Additionally, different customer-asset combinations behave very differently from
each other and it is recommended that the regulator mandate NPA recognition
rules at the level of each asset-class and require that all banks conform to these
mandates. [Identical to Recommendation 4.21 for NBFCs]
4.4
All banks should be required to publicly disclose the results of their stress tests
both at an overall balance sheet level as well as at a segmental level at least
annually. [Identical to Recommendation 4.22 for NBFCs]
4.5
From the perspective of Stability that entails sustainable pricing, banks must be
required to freely price farm loans based on their risk models and any subventions
and waivers deemed necessary by the government should be transferred directly to
the farmers and not through interest subsidies or loan waivers. The permission to
price farm loans below the base rate should be withdrawn. [Also see
Recommendation 4.34]
4.6
Banks are already permitted to set up specialised subsidiaries upon getting specific
approvals from the RBI. However, no approvals have been granted; potentially due
to concerns around circumvention of branch licensing guidelines. In light of the
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Recommendations Regarding Credit
recent relaxation of branch licensing guidelines and the capability to carry out
consolidated supervision, the requirement of prior approvals may be removed for
the purpose of creating dedicated subsidiaries for financial inclusion.
4.7
The decision on the manner in which risk sharing and credit approval arrangements
need to be structured between banks and their agents can be left to the judgment
of banks. Outsourcing guidelines should be amended to permit this.
4.8
There is a need to develop a robust legal and regulatory framework around
customer data generated in various transactions (credit and payments, digital and
off-line), with the objective of customer ownership of their own transactions data
and its use, among others, for signalling credit-worthiness. RBI should constitute a
Working Group comprising TRAI, CERC, and Credit Information Companies to
develop a framework for sharing of data between telecom companies, electrical
utilities, and credit bureaus. This framework should be in keeping with the FSLRC‘s
draft Indian Financial Code which recommends the creation of regulations on the
collection, storage, modification and protection of personal information by
financial services providers; and establishment of mechanisms to ensure that
consumers have access to, and are given an effective opportunity to seek
modifications to, their personal information. [Identical to Recommendation 4.42]
4.9
The stipulation that the all-inclusive interest charged to the ultimate borrower by
the originating entity should not exceed the Base Rate of the purchasing bank plus
8 per cent per annum should be removed. [Identical to Recommendation 4.37]
4.10
Credit facilities documented as bonds or Pass-Through Certificates (PTC), whether
originated directly or purchased in the secondary markets should be permitted to
be held in the ―banking book‖ of a bank based on declared intent and not merely
based on source or legal documentation. [Identical to Recommendations 4.1(b) and
4.30]
4.11
RBI should represent to the Government of India to restore the tax-free status of
securitisation SPVs as pass-through vehicles for tax treatment so as to create
pathways for Wholesale Banks to provide liquidity to other Banks and Financial
Institutions directly originating assets in priority sectors. [Identical to
Recommendations 4.1(c) and 4.38]
4.12
Reorient the focus of NABARD, CGTMSE, SIDBI, and NHB to be market makers and
providers of risk-based credit enhancements rather than providers of direct
finance, automatic refinance, or automatic credit guarantees for National Banks.
4.13
Regional Banks continue to have a strong appeal for inclusion but low
demonstrated stability in the Indian context. Robust solutions are required vis-à-vis
regulation, supervision, risk management, and governance of the existing Regional
Banks before any new ones are created.
4.14
In a manner similar to National Banks, for Regional Banks as well, refinance by
NABARD or credit guarantee support by CGTMSE should be designed as risk-based
guarantees and not available automatically. [Similar to Recommendation 4.12]
4.15
While the Risk Based Supervision process has been designed for the larger and more
complex institutions, a similar effort could be conceived of for the Regional Banks
allowing supervisors to direct scarce on-site supervision resources to higher-risk
institutions. The help of commercial ratings agencies could also be taken to
formally rate these Regional Banks and provide the ratings to the depositors on a
regular basis – thus including them more directly into the risk-containment process.
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Recommendations Regarding Credit
4.16
Since DICGC offers deposit insurance to these banks, the Agreement between
DICGC and the bank provides an additional opportunity to both ensure that the
bank is run well on an on-going basis and resolved quickly in the event that it turns
insolvent. Such an Agreement would provide for risk-based pricing of deposit
insurance; the right to carry out both on-site and off-site inspections; and to take
possession of the bank in the event that it goes into liquidation.
4.17
A State Finance Regulatory Commission (SFRC) could be created into which all the
existing State Government-level regulators could be merged and functions like the
regulation of NGO-MFIs and local Money Services Business could be added on. In
some states, the SFRC could be created by upgrading existing Institutional Finance
Cells. There is also value in bringing the regulatory function close to the
enforcement function under the Economic Offences Wing (EOW), so as to ensure
that they are working closely together. The RBI must be closely involved over a
longer time frame in training the commissioners and licensing and accrediting the
Commission itself. The local regional directors of the RBI could, for example, be
ex-officio Chairs of the Commission‘s Board of Governors while the Commissioner
could be a senior State level appointee drawn from the local Banking community.
The District Magistrates would also play an important role in their respective
districts.
4.18
The Committee recognises that a partial convergence of NBFC and Bank regulations
may be desirable. It recommends the following:
Regulations
Minimum Capital
Adequacy
Cash Reserve Ratio
Banks
NBFC
9%
15%
4%
N.A
Statutory Liquidity
Ratio
23%
15% for D-NBFCs
on their deposits
Duration to qualify
for NPA
Non-repayment for 90
days
Non-repayment
for 180 days
Definition for substandard asset
NPA for a period not
exceeding 12 months
NPA for a period
not exceeding 18
months
Remaining sub-standard
asset for a period of 12
months
Remaining substandard asset for
a period
exceeding 18
months
Definition for
doubtful assets
Recommendation
No case for
convergence.
CRR applicable on
bank deposits,
shift to exclude
time deposits
recommended.
Complete
elimination
recommended.
Case for
convergence.
Risk-based
approaches to be
followed for both
types of
institutions.
Case for
convergence.
Risk-based
approaches to be
followed for both
types of
institutions.
Case for
convergence.
Risk-based
approaches to be
followed for both
types of
institutions.
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Recommendations Regarding Credit
Quantum of
provisioning for
Standard Assets
Priority Sector
Direct advances to
agricultural and Small
and Micro Enterprises
(SMEs) sectors at 0.25%
0.25%
40% of ANBC
NIL
Deposit Insurance
YES
NO for D-NBFCs
SARFAESI eligibility
YES
NO
Lender of Last
Resort
Risk Weights
YES
NO
Differential
100% for all
assets
Rs. 2-5 crore
Entry Capital
Requirement
Rs. 500 crore
Case for
convergence.
Risk-based
approaches to be
followed for both
types of
institutions. For
agricultural
advances, this
would imply at
least 0.40%.
No case for
convergence.
No case for
convergence.
Case for
convergence
subject to strong
customer
protection
guidelines.
No case for
convergence.
No case for
convergence.
No case for
convergence.
4.19
Multiple NBFC definitions should be consolidated into two categories: a distinct
category for Core Investment Companies (CIC) and another category for all other
NBFCs. Benefits that were previously available to specific NBFC types, such as tax
benefits, bank limits, and priority sector benefits should continue to be available
even after consolidation, on a pro-rata asset basis.
4.20
The Committee recommends addressing wholesale funding constraints faced by
NBFCs in a systematic manner. The following are the specific recommendations in
this regard:
a. A clear framework to be developed by RBI and SEBI for Qualified Institutional
Buyers and Accredited Individual Investors who may participate in debt market
issuances of NBFCs.
b. Benefit of ‗shelf prospectus‘ should be available for one year to all issuers
including NBFCs.
c. Permit ECB in Rupees for all institutions.
d. For ECB not in Rupees, eligibility should be linked to size and capacity to
absorb foreign exchange risk rather than specific NBFC categories.
e. The nature of activity, rather than institution type, must be made the criterion
for availing refinance from NABARD, NHB, SIDBI and credit guarantee facilities.
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Recommendations Regarding Credit
f. Current capitalisation slabs on foreign equity funding should be relaxed and
money laundering concerns should be mitigated by instituting additional
reporting requirements on Banks/Authorised Dealers (AD).
4.21
In a manner similar to banks, different customer-asset combinations behave very
differently from each other and it is recommended that the regulator specify NPA
recognition and provisioning rules, including for standard assets, at the level of
each asset-class and require that all NBFCs conform to these mandates. [Identical
to Recommendation 4.3 for National Banks]
4.22
Require all NBFCs to have better on-going risk measures. These include disclosure
of their stress test results both at an overall balance sheet level as well as at a
segmental level at least annually. All NBFCs must adopt core banking systems so
that this can enable better off-site supervision. [Identical to Recommendation 4.4
for National Banks]
4.23
Enable better benchmarking by requiring all NBFC-MFIs to disclose their operating
costs (direct and indirect) of a mature branch to the RBI or MFIN once it becomes
an SRO.
4.24
The regulatory focus must be on total indebtedness of the small borrower in
relation to their debt-servicing capacity and not just indebtedness per se or merely
from NBFC-MFIs. Keeping this in mind, the total borrowing limit for the small
borrower segment may be increased immediately to Rs. 100,000 across all lenders,
including bank-lending to this segment. In order to implement this, all lenders to
this segment will need to be mandated to report to the credit bureau as has been
the case with NBFC-MFIs. If total indebtedness is being tracked adequately, the
stipulation of a maximum number of lenders appears redundant and can be
gradually removed as this would also help in creating intensified price competition.
4.25
All policy biases against consumption finance need to be removed. An example of
this is restricting the proportion of consumption finance that is permitted for NBFCMFIs.
4.26
In order to enable the gradual transition of eligible and interested NBFCs to
Wholesale Consumer Banks or Wholesale Investment Banks or National Banks, the
Committee recommends a re-examination of PSL definitions [also see
Recommendation 4.41], creating an active market for PSL assets, assessment of the
relevance of SLR in light of capital adequacy norms, and application of CRR on time
liabilities.
4.27
Under the Banking Regulation Act, a set of banks may be licensed which may be
referred to as Wholesale Banks with the following characteristics:
a. Given that their primary role is lending and not the provision of retail deposit
services, they will only be permitted to accept deposits larger than Rs. 5 crore.
b. Since they could expect to borrow large amounts from other banks, net
liabilities from the banking system will be permitted to be deducted from their
NDTL computation for the purposes of ascertaining their SLR obligations on par
with the treatment currently given for CRR.
c. Since other banks are expected to lend large amounts to Wholesale Banks,
those other banks will be permitted to deduct their net assets to the banking
146
Recommendations Regarding Credit
system from the computation of their ANBC (the amounts on which PSL
requirements are to be applied).
d. In view of the fact that they will not take retail deposits, the minimum entry
capital requirement for them will be Rs. 50 crore compared to the Rs. 500 crore
required for full-service SCBs.
e. If the institution has fewer than twenty branches through which it operates, it
will not be required to meet the 25 per cent branching requirement.
Institutions with twenty or fewer branches could be referred to as Wholesale
Investment Banks while those with a larger branch network could be referred to
as Wholesale Consumer Banks.
f. Wholesale Consumer Banks should be permitted to act as BCs for other full
service Banks.
They will be required to comply with all other RBI guidelines relevant for SCBs and
will be granted all the other rights and privileges that come with that licence.
4.28
All loans given to landless labourers and small and marginal farmers should be
counted as a part of Direct Agriculture and not merely the wages component of a
loan given to a farmer for financing her agricultural production.
4.29
Investment by banks in bonds of institutions must qualify for PSL where wholesale
lending to the same institutions already qualifies under PSL.
4.30
Credit facilities documented as bonds or Pass-Through Certificates (PTC), whether
originated directly or purchased in the secondary markets should be permitted to
be held in the ―banking book‖ of a bank based on declared intent and not merely
based on source or legal documentation. [Identical to Recommendations 4.1(b) and
4.10]
4.31
Investment by banks in the form of non-fund based limits (such as guarantees)
should qualify for PSL to the extent of the credit equivalent amount of the offbalance sheet facility where loans to these categories qualify for PSL. ANBC should
also be adjusted to include such PSL-linked, non-fund based limits.
4.32
Equity investments by banks in complementary infrastructure within the purview of
PSL guidelines, such as rural warehouses, market yards, godowns, silos, and NBFCs
in low financial depth districts. These equity investments should be eligible for
contribution to the overall priority sector lending targets. They should be
permitted where debt already qualifies for PSL but with a multiplier of four, to
reflect the higher risk and the illiquid character of these investments. The benefit
must accrue as long as the equity investment is held by the Bank. This list of
eligible equity investments may be varied from time-to-time. [Identical to
Recommendation 4.44]
4.33
PSL targets should be applicable on the last reporting Friday during the last month
of each quarter in exactly the same manner as it is currently applicable in the
month of March, so as to ensure more timely and continuous credit flow into
priority sectors. In order to ensure administrative ease, requirements such as
investment into RIDF can continue to be levied on an annual basis and computed on
the basis of the average of the quarterly requirements.
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Recommendations Regarding Credit
4.34
If the government does desire to provide relief in any form to the small farmer, it
would be best carried out as a direct benefit transfer (DBT) to the bank account of
the farmer and not through the mechanism of either interest subvention or debt
waiver. This would ensure that the banking system is able to price loans in a
sustainable manner and also protect credit discipline amongst its borrowers.
Adding a universal requirement to report all defaults to credit bureaus would
ensure that the borrower also builds a strong interest in protecting his credit
history, even if he is a recipient of DBTs. [Similar to Recommendations 4.2 and
4.43]
4.35
In order to guard against large scale defaults resulting from catastrophic events,
banks should be permitted to work closely with insurance companies to purchase
bank-wide portfolio level insurance against events such as large scale rainfall
failure on a regional or national basis, instead of having an expectation that relief
would be provided from national or state budgets.
4.36
For the provision of food-credit, Food Corporation of India (FCI) and State
Governments should be required to originate warehouse receipts and raise low-cost
funds in the market against these receipts instead of being reliant only on bank
credit. [Identical to Recommendation 4.46]
4.37
The stipulation that the all-inclusive interest charged to the ultimate borrower by
the originating entity should not exceed the Base Rate of the purchasing bank plus
8 per cent per annum should be removed. [Identical to Recommendation 4.9]
4.38
The RBI should represent to the Government of India to restore the tax-free status
of securitisation SPVs as pass-through vehicles for tax treatment so as to create
pathways for Wholesale Banks to provide liquidity to other Banks and Financial
Institutions directly originating assets in priority sectors. [Identical to
Recommendation 4.11]
4.39
While a market that trades PSL assets will be of critical importance, regulation
should additionally enable the use of risk-free PSL Certificates as a means to
achieving PSL compliance amongst banks that wish to do so.
4.40
In order to enable greater regional and sectoral specialisation among Banks, the
Committee recommends that the RBI revise the PSL targets and require banks to
meet an Adjusted PSL target of 50 per cent against the current requirement of 40
per cent. Districts and sectors are weighted based on the difficulty in lending to
them, and a Bank lending to a difficult sector in a difficult to reach district can
benefit from a multiplier value based on the specific sector and district. Every
sector-district combination has a weight associated with it and the Bank will have
to reach an adjusted PSL value of 50% taking these weightages into account.
4.41
The Committee recommends that RBI seriously examine moving to a new
framework in which two parameters: District level credit depth, and sector and
sub-sector level credit depth be used to determine the sector, sub-sector, and
regional weights which are published every three years. Using these weights banks
would be required to reach an Adjusted PSL target of 150 per cent of ANBC.
4.42
There is a need to develop a robust legal and regulatory framework around
customer data generated in various transactions (payments and credit, digital and
off-line), with the objective of customer ownership of their own transactions data
and its use, among others, for signalling credit-worthiness. RBI should constitute a
148
Recommendations Regarding Credit
Working Group comprising TRAI, CERC, and Credit Information Companies to
develop a framework for sharing of data between telecom companies, electrical
utilities, and credit bureaus. This framework should be in keeping with the FSLRC‘s
draft Indian Financial Code which recommends the creation of regulations on the
collection, storage, modification and protection of personal information by
financial services providers; and establishment of mechanisms to ensure that
consumers have access to, and are given an effective opportunity to seek
modifications to, their personal information. [Identical to Recommendation 4.8]
4.43
Universal reporting to credit bureaus should be mandated for all loans, both
individual and SME, but in particular SHG loans, Kisan Credit Card, and General
Credit Card. [Identical to Recommendation 4.2]
4.44
Equity investments by banks in complementary infrastructure within the purview of
PSL guidelines, such as rural warehouses, market yards, godowns, silos, and NBFCs
in low financial depth districts. These equity investments should be eligible for
contribution to the overall priority sector lending targets. They should be
permitted where debt already qualifies for PSL but with a multiplier of four, to
reflect the higher risk and the illiquid character of these investments. The benefit
must accrue as long as the equity investment is held by the Bank. This list of
eligible equity investments may be varied from time-to-time. [Identical to
Recommendation 4.32]
4.45
For the provision of food-credit, Food Corporation of India (FCI) and State
Governments should be required to originate warehouse receipts and raise low-cost
funds in the market against these receipts instead of being reliant only on bank
credit. [Identical to Recommendation 4.36]
4.46
RBI needs to write to each of the State Governments expressing its support for the
recommendations of both the PLATINUM Group and the Rajan Committee (2009)
and urge them to implement those ideas by pointing out the potential benefits to
the expansion of banking and financial activity in their respective states.
4.47
Banks and Financial Institutions should be required to verify the land records of
their clients at the time of making loans and in those states where this is possible,
to insist that transfers take place before a loan can be renewed for a second time.
4.48
Equity investments by banks in private companies engaged in the task of installing
and operating weather stations, or in creating markets for second-hand assets
should be eligible for PSL treatment. These investments should also get a multiplier
of four, to reflect the higher risk and the illiquid character of these investments.
[Also see Recommendation 4.44]
149
Section 5
Universal Access to Investment and Risk Management Products
Investment and Risk Management: Introduction and Strategic Direction
Chapter 5.1
Introduction and Strategic Direction
The vision statements that are relevant to ensuring universal access to investment and risk
management products are as follows:
Universal Access to a Range of Deposit and Investment Products at Reasonable Charges: By
January 1, 2016, each low-income household and small-business would have ―convenient‖
access to providers that have the ability to offer them ―suitable‖ investment and deposit
products, and pay ―reasonable‖ charges for their services. By that date each District would
have a Total Deposits and Investments to GDP ratio of at least 15 per cent. This ratio would
increase every year by 12.5 per cent with the goal that it reaches 65 per cent by January 1,
2020.
Universal Access to Range of Insurance and Risk Management Products at Reasonable
Charges: By January 1, 2016, each low-income household and small-business would have
―convenient‖ access to providers that have the ability to offer them ―suitable‖ insurance
and risk management products, which, at a minimum allow them to manage risks related
to: (a) commodity price movements; (b) longevity, disability, and death of human beings;
(c) death of livestock; (d) rainfall; and (e) damage to property, and pay ―reasonable‖
charges for their services. By that date each District would have a Total Term-Life
Insurance Sum Assured to GDP ratio of at least 30 per cent. This ratio would increase every
year by 12.5 per cent with the goal that it reaches 80 per cent by January 1, 2020.
Financial inclusion can be said to be complete only when there is access to a suite of
appropriate products and services for all the financial needs of a household or enterprise.
Households planning for long-term goals such as retirement require inflation adjusted
returns on investment over substantial time-periods. Parents planning for the education of
children need to manage inflation risk. Households whose asset profiles are concentrated
in the local village economy need access to investments that will provide them exposure
to the national economy. Farmers planning for their next crop require credit bundled with
weather insurance that will pay out in case of extreme weather outcomes. Each and every
household has a combination of such crucial needs that need fulfilment. It is the function
of the nation‘s financial system to provide accessible and economical product solutions
that meet these needs.
In order to assess the current state of access to investment and insurance products for
low-income households, the case study of an actual rural household and the challenges it
faces in accessing appropriate savings, investment and risk management is particularly
instructive:
Shivani Devi (45) and her husband Chaman Singh (47) belong to the village of Sagavan
Gaon in Uttarakhand. They have four children – Vinod (14), Savita (13) and Rohit (10) are
in school, while the youngest Rajesh (7) has not yet started schooling. The household had
an annual income of around Rs. 65,000. Shivani Devi kept 13 goats, which they sold as and
when money was needed. This usually amounted to selling 3 goats on average each year,
with each goat fetching approximately Rs. 3,000. The availability of NREGA work is erratic
and contributed an income of Rs. 4,000 annually. Shivani Devi cultivated a patch of land
they owned, and incurred expenses for seeds and fertilisers. The entire produce from the
land was used up for household consumption with little remaining for sale in the market.
The sale of milk from their buffalo earned them Rs. 16,000 annually. Chaman also
undertook some construction work, which earned the household Rs.36,000 annually.
Shivani Devi was involved in an accident and lost her life in December 2011. Shivani Devi
was bringing in more than half of the family‘s income by being involved in multiple
activities, besides also taking care of her family‘s needs. Her death triggered a chain of
events in its wake.
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Investment and Risk Management: Introduction and Strategic Direction
1. To meet the urgent need for money such as for funeral and household expenses, the
family resorted to selling off a few goats, as well as selling off their buffalo for a price
of Rs.29,000, which was 35 per cent lower than the price at which they had purchased
it. Selling off the buffalo meant the loss of Rs.1500/month as income from the sale of
its milk. The lack of any liquid assets in the household, such as savings in a bank
account, meant that the household had to undertake distress sales of its productive
assets. Shivani Devi had taken out some insurance cover that enabled her family access
to some insurance payouts after her death.
2. Shivani Devi had purchased an accident insurance policy for Rs. 1,00,000, Chaman
received the claim amount after 3 months of her death. Chaman plans to save this
money for his kids‘ marriage and education.
3. Shivani Devi had a life insurance cover (endowment policy) in her name where she
used to remit Rs.138 on a monthly basis. She had been saving in this manner for almost
6 years till her death. This came to around Rs. 9,384 in the account. Chaman hoped to
receive a payout of Rs. 25,000 with bonus, from this scheme. Endowment policies,
such as this rural life insurance product, are 3-4 times costlier than a term life
insurance cover. However, in the absence of adequate access to a term life policy,
Shivani Devi had deployed her funds in the more expensive endowment product that
was available to her. In addition, the formalities in accessing the insurance payout
have taken a long time and, as a result, Chaman was not sure when he will get the
payout.
4. Shivani Devi contributed 40 per cent of the family‘s income by utilising her human
capital to the extent possible. This income-stream has been lost as a result of her
death and the insurance protection she had taken was inadequate to cover the future
income lost (present value estimated at Rs. 150,000) as a consequence of her death.
As a result, the household will not be able to sustain the standard of living they
enjoyed while Shivani Devi was alive.
5. Since her death, cultivation has been neglected and the reduced produce from the
land meant an increase in their consumption expenditure for food. Chaman dedicated
a lot more of his time to his children, in addition to taking care of the land and their
goats. Because of this, he finds it difficult to find enough work since opportunities in
the local labour markets are available mostly in the mornings when he is busy taking
care of his children. He estimates that he will lose at least Rs. 10,000 in the form of
labour income which he used to earn previously.
6. The family has not considered the expenses the household will have to incur for higher
education of the children beyond school. In considering long-term education expenses,
they will also need to think about long-term inflation risk. They will need access to
financial mechanisms that will enable them to systematically save over the long-term
and at the same time ensure that the value of their savings keeps up with inflation and
earns sufficient returns over this period - so that it can be used to meet the education
expenses as they become due.
A well-functioning financial system would help Shivani Devi‘s family by providing a range
of financial services in the following ways:
1. Supply Shivani Devi and Chaman Singh with adequate life insurance that allows the
family to continue living (upon the event of either‘s death) without compromising their
living standards. This would entail access to an insurance policy that would cover them
to the extent of their remaining human capital in the event of death. This would
amount to human capital of Rs. 150,000 for Shivani Devi, assuming that she sustained
her current income-earning capacity till the age of 60. The corresponding cover for
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Investment and Risk Management: Introduction and Strategic Direction
Chaman would be Rs. 270,000. They would also have access to purchase accident
insurance, which would give them additional disability cover in case of disability due
to accidents.
2. Enable her family to collect insurance payouts in an efficient manner without
administrative delays, at a physical location that is easily accessible, and store the
payout in a financial instrument which offers growth for the corpus as well as liquidity.
Liquidity would enable Chaman to receive periodic payouts or to withdraw from the
corpus as and when required to meet expenditures.
3. Provide long-term options to save funds for children‘s education and to plan for
retirement, with inflation protection so as to enable the household to secure the
future of their children as well as the retirement needs of Chaman.
Low Income households and small businesses need access to a range of investment and risk
management products in order to enable financial well-being. These need to be easily
accessible to the household. There are therefore two sets of strategic issues that need to
be addressed here, one relating to distribution channels for these services and the other
related to the types of products that need to be made available through these channels.
The issues related to distribution channels will be addressed in this Chapter while those
relating to specific products would be addressed in later Chapters which are specific to
each regulator.
Integrated Distribution Channels
The current distribution channels available to most households comprises the local post
office as a means to save, the agents of one or more insurance companies who offer pure
life insurance or endowment plans, besides the possibility of a local bank branch or credit
cooperative or MFI that she can approach for her credit needs. Options to invest in the
national debt and equity markets as a way to reduce concentration of household
investments in local physical assets are virtually non-existent.
The current delivery framework is characterised by dispersed entities focussed on a single
product or product category. Even if a rural or semi-urban customer has access to such a
front-end, she is unable to avail all the financial services she needs so as to secure herself.
Such a situation severely compromises the financial wellbeing of the customer on account
of the paucity of access, the absence of comprehensive service providers and the lack of
customised solutions, leading to outcomes such as: (a) financial stress due to mismatches
between frequency of cash-inflows and debt servicing frequencies; (b) over-investment in
assets whose value is highly correlated with the state of the local economy; and (c) underinsurance against risk of accidental death of self or the death of livestock. From the
perspective of providers as well a fragmented approach towards the provision of
comprehensive financial services has also proved to be very expensive.
While, for access to payments services and routine transactions relating to deposit and
investment products, a far more granular and therefore ―lighter‖ presence would be
required, for comprehensive financial services to be offered to customers, the Committee
envisages the presence of financial institutions that would have a seamless front-end
interface for clients to access a full range of services, all of which can be accessed
through a one-time KYC process and an enrolment process that meets the requirements of
all financial institutions and regulators. The institution may have physical branches that
service remote pockets and target every last household and enterprise within its
geography. The geographical spread of these local institutions may well be limited, but
their strength will be the depth of penetration into local geographies enabling them to
harness the benefits from economies of scope. Such a deep branch network will make it
possible to build a granular understanding needed to design a range of financial products
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Investment and Risk Management: Introduction and Strategic Direction
and services required by those in that geography, be they individuals, households or
enterprises. It would make possible the effective use of ―soft‖ local information. With a
granular understanding of the segments they serve, these institutions will be ideally
placed to negotiate with AMCs/Insurance Companies and provide products and services
that are suited to the context of the customer‘s and her household‘s realities. For
instance, if a customer requires a life insurance cover for Rs. 10 lakh, the institution must
be able to provide just that, and not end up under-insuring or over-insuring her due to the
rigidity in pre-designed product features. If a customer needs a facility where she can
make small investments and redemptions in a debt-linked mutual fund, of as small as
Rs.10 a day, she must be able to do so in cash in a seamless manner.
In the context of the architecture discussed in this report, these comprehensive financial
services providers would be either branches of Banks or NBFCs or their agents and would
be stand-long agents of insurance companies or Asset Management Companies. One
example of this is Cashpor Micro Credit, a Micro Finance Institution based in Uttar
Pradesh.
Cashpor is established as a Section 25 Company and was one of the first Micro Finance
Institutions in India. Cashpor is the Banking Correspondent of IndusInd Bank and mobilises
savings on behalf of the bank. So far, in FY 2013 Cashpor has opened 69,458 savings
accounts in 131 branches across 8 districts, of which 66 per cent have non-zero balances,
with a total transaction volume of Rs. 12 crore - aggregate deposits of Rs. 7 crore and
aggregate withdrawals of Rs. 5 crore. Cashpor also brought out two new products in this
financial year to add to the BC savings account offering: recurring deposit accounts and
fixed deposit accounts, with an eye to encouraging customers to develop stable, longterm, and consistent savings habits, earning higher rates of interest on their deposited
funds. So far, 542 fixed deposit accounts have been opened with an aggregate balance of
Rs. 1 crore, and 2,545 recurring deposits account opened, with an aggregate balance of
Rs. 4 lakh.
Cashpor is a lender with its own balance sheet, where it largely provides the classic Micro
Finance Joint Liability Group (JLG) loan, which it offers in weekly, fortnightly, and
monthly repayment options. The ticket size of these loans ranges from Rs. 2,000 to Rs.
25,000 and the rate of interest charged is in the range of 25 per cent. Cashpor has also
started branching out into newer credit products as indicated in the table below.
Table 5.1.1
Cashpor‘s Credit, and Savings and Investment Products
Cashpor‘s Credit Products
Micro Finance:
Joint Liability
Group (JLG)
Loans
Women Empowerment
Loan
Safety (Emergency)
Loan
Energy Loan
Cashpor‘s Savings and Investment
Products
Micro savings:
Old Age Pension:
Savings and
Deposit
accounts
available with
IndusInd Bank
via BC model
NPS-Swavalamban
Health (Water,
Sanitation) Loan
In addition to mobilising savings and providing credit, Cashpor is also an Aggregator for the
NPS-Swavalamban scheme, providing a pension like product for households in the
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Investment and Risk Management: Introduction and Strategic Direction
unorganised sector. The NPS-Swavalamban scheme was launched on a pilot basis in four
branches in two districts in November 2012, with an uptake of 17,000 customers within
two months. This was later expended to 206 branches in nine districts by February 2013.
By the end of March 2013, a total of 20,012 clients had been enrolled. Most of these
customers were eligible for the NPS-Swavalamban contribution of Rs. 1000.
However, to ensure that there is an orderly growth in the number and reach of such
integrated providers, particularly in the context of small businesses and low-income
households, a number of issues would need to be addressed including, the need for a
Universal Electronic Bank Account (UEBA), consistent cross-regulator KYC guidelines, and
consistent cross-regulator guidelines on agents.
Universal Electronic Bank Account
IRDA‘s AML/CFT Guidelines for General Insurers permits cash remittance of premiums up
to a limit of Rs. 50,000. Beyond this amount, premium payments are only allowed through
cheques, demand drafts, credit cards or other banking channels, excluding cash, in order
to ensure that premiums are paid out of clearly identifiable sources of funds. Payments
from insurance companies on account of realisation of claims are required to be made into
the bank account of the beneficiary. This is done in order to ensure that funds reach the
appropriate person. In the case of life insurance, claim payments upon death where the
payment exceeds Rs.10,000 can be done only through Account Payee Cheques, or
electronic payment methods approved by RBI.
As indicated earlier, customers can pay insurance premiums up to amounts of Rs. 50,000 in
cash. However, there are restrictions on the routing of cash premiums that specifically
impact NBFCs. NBFC customers are required to pay their premiums directly to the
insurance company without the money touching the account of the NBFC225. In the current
environment, this is a critical barrier in the ability of NBFCs to meaningfully provide
insurance services. Since NBFCs do not have deposit taking capability, the committee
recommends that the restriction on NBFCs being BCs of Banks be removed. Permitting
NBFCs to source deposits on behalf of Banks will mean that customers of NBFCs can get a
bank account (with the Sponsor Bank) that will enable savings and also allow insurance
premiums to be paid directly from customer accounts. The concern around commingling of
funds from deposit mobilisation and the NBFC‘s lending business can be addressed with
the help of technology today which enables intra-day clearance of funds to greatly
minimise this risk.
In this context, the Committee reiterates the need for a universal full-service electronic
bank account for every citizen of India above the age of 18. Without this bank account a
citizen can find herself excluded from many financial services crucial to her well-being. It
also recommends that rather than being barred by regulation from doing so individual
Banks be permitted to decide if NBFCs (including NBFC-MFIs) can be appointed as their BC
or not. This will ensure that a full range of providers can start to serve the customer in a
seamless and a low-cost manner.
Cross-Regulator KYC Guidelines
IRDA‘s AML/CFT Guidelines for General Insurers226 places the responsibility of a robust
AML/CFT on the insurer. It also requires a strengthening of the control of insurers (both
general and life) over Corporate Agents through a list of rules and regulations covering
performance of agents including mandatory assessment of KYC norms. The KYC process
requires verification of documented identity and address proofs and a recent photograph.
SEBI‘s circular on Uniform KYC for the Securities Markets227 requires verification of both
Proof of Identity and Proof of Address by the Asset Management Company.
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Investment and Risk Management: Introduction and Strategic Direction
As indicated in Chapter 3.1, proof of identity can be obtained by the individual from local
authorities at the place at which they were born but proof of local address is much harder
to obtain. The Committee therefore believes that a superior approach would be to insist
on a strong proof of identity like Aadhaar in all cases and to require financial institutions
to internally develop their own risk based processes which are linked to transactions
monitoring and usage patterns to identify and address high risk cases once identity has
been clearly established. And, since the UIDAI letter containing the Aadhaar number is
itself not a very secure form of authentication, as there is the possibility that it can be
forged. Aadhaar e-KYC provides for greater security with verification done through
biometric authentication of the customer with the Aadhaar database. IRDA, SEBI and
PFRDA have all issued circulars228 permitting Aadhaar e-KYC to be used as proof of identity
and address.
The Committee also recommends that instead of requiring each of their regulated entities
to carry out their own KYC checks, Insurance Companies, Asset-Management Companies,
Banks, and Non-Banking Financial Companies be permitted to rely on the KYC carried out
by each other. Since all regulators have permitted the use of e-KYC, effectively UIDAI
becomes the central repository for identity related information for the entire system.
Cross-Regulator Suitability Guidelines
A multi-product environment blurs the lines between regulatory domains and the worry
with such an environment would be the task of ensuring protection of customers from
miss-sale and from any dishonouring of post-sale service agreements. It is essential that a
uniform framework for consumer protection be applicable across all regulators. This will
be discussed in detail in Section 6.
Recommendations
5.1
Every resident should be issued a Universal Electronic Bank Account (UEBA)
automatically at the time of receiving their Aadhaar number by a high quality,
national, full-service bank. An instruction to open the bank account should be
initiated by UIDAI upon the issuance of an Aadhaar number to an individual over
the age of 18. The bank would need to be designated by the customer from
amongst the list of banks that have indicated to UIDAI that they would be willing to
open such an account with the understanding that it would attract no account
opening fee but that the bank would be free to charge for all transactions,
including balance enquiry with the understanding that such transactions‘ charges
would provide the host banks with adequate compensation. The Bank would be
required to send the customer a letter communicating details of the account thus
opened. The Committee recommends that the RBI issue a circular indicating that
no bank can refuse to open an account for a customer who has adequate KYC which
specifically includes Aadhaar. [Identical to Recommendation 3.1]
5.2
RBI should require a strong Proof of Identity (POI) for each and every customer and
a documentary proof of one national address but waive the requirement of
documentary proof for the current address, for the purpose of opening a fullservice bank account. It should instead enjoin upon banks to carry out careful
tracking of usage and transactions patterns to ascertain the risk levels of the
customer and take necessary action based upon risk-based surveillance processes
developed internally by each bank. RBI must take the lead in developing this as a
convergent approach to KYC across all regulators for their respective products.
[Identical to Recommendation 3.2]
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Investment and Risk Management: Appointment of Agents
Chapter 5.2
Appointment of Agents
There are large variations in the guidelines relating to the appointment of agents by each
regulator for each type of channel which are acting as an active barrier for the spread of
investment and risk management products.
National Banks
Banks offer life and general insurance through the ‗bancassurance‘ model where a bank
and an insurance company form a partnership so that the insurance company can sell its
products to the bank‘s customer base. Banks can carry out bancassurance through the
Corporate Agent, Broker and ‗Referral‘ models. Banks have traditionally relied on taking
the Corporate Agent licence229 for selling life and non-life insurance products, where the
Bank is a tied agent to one life and one non-life insurance company. In this model, there is
no risk participation by Banks and they are compensated by commissions from the
Insurance Companies230. For instance, State Bank of India is a Corporate Agent for SBI Life
Insurance, and HSBC is Corporate Agent for Tata AIG General Insurance.
Until 2013, Banks were not permitted to be brokers as per the Broker Guidelines of
2002231. This was because brokers were deemed to be entities that performed the
insurance business alone. However, the new IRDA Licensing of Banks as Insurance Brokers
Regulations 2013232 now permit a Bank to act as insurance broker without the need to set
up separate entity for the same, as was the case previously. This has been done so as to
ensure that banks have the opportunity to represent the interests of customers and use
their wide branch networks to offer greater choice and better service to customers. As in
the case of Corporate Agents, there is no risk participation by Banks, and they are
compensated by commissions from Insurance Companies233. Recent Draft Guidelines laid
out by RBI on the subject clarify that Banks offering insurance broking services shall not
enter into any arrangement for corporate agency or insurance referral business234. Banks
are also permitted to enter into ―referral‖ arrangements with Insurance Companies235,
whereby they offer branch space to personnel of the insurance company to operate in and
sell their insurance products. Banks do not participate in the risk and are remunerated in
the form of a fee that is negotiated with the insurance company.
Banks can also act as distributors of Mutual Funds and as Investment Advisors with prior
approval of the RBI. Banks can be distributors of mutual funds but only in the capacity of
agent of the customer (even if the AMC is a subsidiary of the Bank). As agents, Banks can
forward investors‘ applications for purchase or sale of MF units to the Mutual Funds or the
Registrars or the transfer agents. Banks should not acquire MF units from secondary
market, or from customers236. Entry loads are not permitted and there are no transaction
charges for subscriptions less than Rs. 10,000. Beyond that, there is a charge of Rs. 100 for
existing customers and Rs. 150 for first time customers237. Banks can also act as
Investment Advisors. All of the bank‘s remuneration in this case will be from the client,
with nothing from the Asset Management Company. It is expected that the Investment
Advisor will disclose any conflict of interest due to other activities to the client. There
should be an arms-length relationship of the investment advisory services with rest of the
activities of the Bank238.
Regional Banks
Scheduled or licensed State Cooperative Banks and licensed District Central Cooperative
Banks having a minimum net worth of Rs.50 crore are permitted by RBI to undertake
insurance sales both as Corporate Agents (with permission from RBI) and on a referral basis
(without permission from RBI)239. Many Regional Banks are Corporate Agents for the sale of
insurance products. For example, Saraswat Cooperative Bank is a corporate agent for
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Investment and Risk Management: Appointment of Agents
Bajaj Allianz General Insurance and Tirunelveli District Central cooperative bank is an
agent for United India Insurance.
AMFI has created two new categories of distributors, one containing Regional Rural Banks,
DCCBs and NBFCs, and the other for UCBs and has considerably reduced distributor fees
for these categories (now set at Rs. 50,000 and Rs. 10,000 respectively, as compared to
previous fees of Rs.250,000), in order to increase retail participation from beyond Tier I
and II cities240.
Business Correspondents
Banks are permitted to appoint Business Correspondents (BCs) whose scope of activities
includes the sale of mutual fund products, pension products, and micro-insurance
products241 and other third party products. A Microsave study242 on the state of BCs in India
finds that most BCs are mono-product, with a focus on deposit mobilisation on behalf of
the Sponsor Bank. A few are dual product, offering savings accounts and remittances.
Some BCs however provide insurance. For instance, Syndicate Bank243 and Allahabad
Bank244 have tied up with Tata AIG and LIC respectively to sell their micro-insurance
products through the banks‘ BCs. However, it appears that there is almost no activity in
terms of investment and pension products being offered through bank BCs.
Non-Banking Financial Companies
Similar to Banks, NBFCs offer life and general insurance through the ‗bancassurance‘
model where an NBFC and an insurance company form a partnership so that the insurance
company can sell its products to the NBFC‘s customer base. NBFCs are also permitted to
be Corporate Agent licencees245 for selling life and non-life insurance products, for which
the NBFC receives commissions from the insurance company it is the agent of 246. In this
model, there is no risk participation by the NBFC.
NBFCs are not permitted to be brokers as per the IRDA Broker Regulations. However, the
IRDA ―Report on Insurance Sub-broking in India‖ published in January 2013 envisages
increasing the penetration of insurance products in rural locations by appointment of subbrokers. This is an important pre-requisite for deepening insurance access in Tier 5 and
Tier 6 locations of the country and consistent with the initiatives of other regulators such
as the Aggregator and Sub-aggregator framework of PFRDA and the Business Correspondent
framework of the RBI. NBFCs are ideally suited to this mission and the recommendations of
this report now need to be implemented as soon as possible so that work on the ground
can begin in earnest. There are however two issues that the recommendations must
address:
1. It would be important to allow sufficient flexibility to Brokers and Insurance
Companies to respond to the diversity in the distribution landscape. For example, the
Report currently recommends limits on the total business volumes of Rs. 10 crore and
premium per policy of Rs. 1 lakh for sub-brokers. Such specific operational details of
the sub-broker arrangement may be best left to the judgment of the respective
Brokers depending on the circumstances.
2. Only formal institutions (such as NBFCs) should be eligible to become sub-brokers
rather than individual agents or unincorporated bodies. Stipulating some minimum
capital requirement for sub-brokers would be effective in this regard. This would
ensure that only serious entities are eligible and policies such as customer protection,
and product Suitability, and online issuance of insurance policies becomes the norm
since such entities would have the capacity to put in place the necessary
infrastructure.
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Investment and Risk Management: Appointment of Agents
NBFCs are not permitted to enter into ―referral‖ arrangements with Insurance
Companies247. However, until 2010 there were no restrictions on such an arrangement. The
2010 regulations clarify that the referral company cannot be in the business of extending
loans and advances, accepting deposits, trading in securities on its own account or on the
accounts of customers. It is again unclear as to why this is a specific concern in the case of
NBFCs alone and not Banks. As long as the same restrictions apply in both cases, such as
the prohibition on the forced bundling of insurance with credit, in view of the Neutrality
principle, NBCFs must be allowed to be able to enter into referral arrangements with
Insurance Companies. Additionally, considering the need to reach out to un-served
segments of the population, it is essential that an effective channel such as the NBFC be
leveraged to its fullest potential in the delivery of insurance and other services.
NBFCs can act as distributors of Mutual Funds with prior approval of RBI. However, they
are subject to some additional conditions such as: NBFCs need to have a minimum net
owned funds of Rs. 100 crore, minimum capital adequacy levels, and net NPA levels and at
least a 3-year history of profitability248. These requirements mean that the majority of
NBFCs in operation currently will be unable to function as distributors of MFs and unable
to use their branches to provide comprehensive financial services. Reaching out to all
corners of the country and ensuring broad based participation by retail investors will
require significantly large number of NBFCs operating in partnership with AMCs, offering at
the very least access to Money Market Mutual Funds and Index Funds. They should be
subject to a more dynamic set of criteria on eligibility and experience. NBFCs are
permitted to be ‗Aggregators‘ for the NPS-Swavalamban Scheme.
Recommendations
5.3
In keeping with the goal of creating integrated providers for financial services
delivery, RBI should publish a guideline towards the appointment of entities
regulated by it, including National Banks, Regional Banks, or NBFCs, as agents. This
guideline should set out the following eligibility criteria for agents:
a. The Agent must not have been subjected to any disciplinary proceedings under
the rules, regulations and bye-laws of a stock exchange, SEBI, RBI, IRDA, FMC,
or any other regulator with respect to the business involving either
organisation, partners, directors, or employees;
b. All Agents must be required to commit some capital against operating risks and
customer protection risks for the business that they are engaged in. While the
minimum amount may be structured as a Rs. 5 lakh security deposit from the
agent, the amount may vary depending on the number of customers and volume
of transactions;
c. There must be suitable limits on cash holding as also limits on individual
customer payments and receipts;
d. Transactions should be accounted for and reflected in the Principal‘s books by
end of day or next working day. Where the transfer of money from agent to
Principal happens on the next working day, there should also be a stipulation
that the agent should transfer the day‘s collections to a non-operative pooled
collections account on the same day itself. To ensure this, the Agent has to
maintain the account with a bank which has online fund transfer facility with
standing instructions to transfer the funds to the designated pool account at
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Investment and Risk Management: Appointment of Agents
the end of each day. This ensures that the clients‘ funds are secure even if the
agent goes bankrupt;
e. To counter the risk of repudiation of transactions, RBI should insist that every
transaction be initiated by the customer. Biometric authentication can help
achieve this. The log of each transaction must be maintained at the agent
level. Each transaction must carry a transaction number and customer must
receive the transaction receipt at the time of the transaction;
f. The Agent must have trained staff that can communicate with the clients about
the details of the products and take full responsibility for communicating with
the clients. The Agent must have a comprehensive human resource policy,
including an incentive plan for staff that not only encourages them to achieve
the business objectives but more importantly prevents mis-selling;
g. The Agent should adopt the Suitability principles of the RBI as well as those of
the Principal‘s regulator. The Agent should also have a mechanism to address
queries and grievance of the customer about the services rendered by it and
publicise it widely through electronic and print media. All customer grievances
should be addressed within a defined time frame.
RBI could then request each regulator to follow this integrated approach to Agent
appointment for its respective products.
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Recommendations Regarding Investment and Risk Management
Chapter 5.3
Recommendations Regarding Investment and Risk Management Products
5.1
Every resident should be issued a Universal Electronic Bank Account (UEBA)
automatically at the time of receiving their Aadhaar number by a high quality,
national, full-service bank. An instruction to open the bank account should be
initiated by UIDAI upon the issuance of an Aadhaar number to an individual over
the age of 18. The bank would need to be designated by the customer from
amongst the list of banks that have indicated to UIDAI that they would be willing to
open such an account with the understanding that it would attract no account
opening fee but that the bank would be free to charge for all transactions,
including balance enquiry with the understanding that such transactions‘ charges
would provide the host banks with adequate compensation. The Bank would be
required to send the customer a letter communicating details of the account thus
opened. The Committee recommends that the RBI issue a circular indicating that
no bank can refuse to open an account for a customer who has adequate KYC which
specifically includes Aadhaar. [Identical to Recommendation 3.1]
5.2
RBI should require a strong Proof of Identity (POI) for each and every customer and
a documentary proof of one national address but waive the requirement of
documentary proof for the current address, for the purpose of opening a fullservice bank account. It should instead enjoin upon banks to carry out careful
tracking of usage and transactions patterns to ascertain the risk levels of the
customer and take necessary action based upon risk-based surveillance processes
developed internally by each bank. RBI must take the lead in developing this as a
convergent approach to KYC across all regulators for their respective products.
[Identical to Recommendation 3.2]
5.3
In keeping with the goal of creating integrated providers for financial services
delivery, RBI should publish a guideline towards the appointment of entities
regulated by it, including National Banks, Regional Banks, or NBFCs, as agents. This
guideline should set out the following eligibility criteria for agents:
a. The Agent must not have been subjected to any disciplinary proceedings under
the rules, regulations and bye-laws of a stock exchange, SEBI, RBI, IRDA, FMC,
or any other regulator with respect to the business involving either
organisation, partners, directors, or employees;
b. All Agents must be required to commit some capital against operating risks and
customer protection risks for the business that they are engaged in. While the
minimum amount may be structured as a Rs. 5 lakh security deposit from the
agent, the amount may vary depending on the number of customers and volume
of transactions;
c. There must be suitable limits on cash holding as also limits on individual
customer payments and receipts;
d. Transactions should be accounted for and reflected in the Principal‘s books by
end of day or next working day. Where the transfer of money from agent to
Principal happens on the next working day, there should also be a stipulation
that the agent should transfer the day‘s collections to a non-operative pooled
collections account on the same day itself. To ensure this, the Agent has to
maintain the account with a bank which has online fund transfer facility with
standing instructions to transfer the funds to the designated pool account at
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Recommendations Regarding Investment and Risk Management
the end of each day. This ensures that the clients‘ funds are secure even if the
agent goes bankrupt;
e. To counter the risk of repudiation of transactions, RBI should insist that every
transaction be initiated by the customer. Biometric authentication can help
achieve this. The log of each transaction must be maintained at the agent
level. Each transaction must carry a transaction number and customer must
receive the transaction receipt at the time of the transaction;
f. The Agent must have trained staff that can communicate with the clients about
the details of the products and take full responsibility for communicating with
the clients. The Agent must have a comprehensive human resource policy,
including an incentive plan for staff that not only encourages them to achieve
the business objectives but more importantly prevents mis-selling;
g. The Agent should adopt the Suitability principles of the RBI as well as those of
the Principal‘s regulator. The Agent should also have a mechanism to address
queries and grievance of the customer about the services rendered by it and
publicise it widely through electronic and print media. All customer grievances
should be addressed within a defined time frame.
RBI could then request each regulator to follow this integrated approach to Agent
appointment for its respective products.
164
Section 6
Customer Protection
Customer Protection: Introduction and Current Approaches
Chapter 6.1
Introduction and Current Approaches
The vision statement that is relevant to customer protection is as follows:
Each low-income household and small-business would have a legally protected right to be
offered only ―suitable‖ financial services. While the customer will be required to give
―informed consent‖ she will have the right to seek legal redress if she feels that due
process to establish Suitability was not followed or that there was gross negligence.
Consumer protection could embody a wide range of measures including disclosure
requirements, conduct of business rules, codes of conduct, product design related
regulations, Suitability and assessment related requirements and would require the
establishment of an appropriate institutional mechanism for implementing such measures
and for redressing consumer complaints that arise from the use of financial services and in
their interactions with financial services providers.
The role of financial services is to help customers maximise the benefit from the human
and other resources that they possess while minimising the impact of adverse shocks on
their lives. Financial products do this by interacting with the ―natural‖ financial flows of
households. This interaction is crucial. The same product that enhances well-being for one
type of customer could do harm in the case of another. An apparently ―simple‖ and
―transparent‖ product such as a loan with fixed monthly payments, while entirely suitable
and value enhancing for an urban salaried household with fixed monthly incomes, can
exacerbate the consumption volatility of a rural household with highly uncertain farm
incomes in a manner identical to a highly leveraged position in equity, and is an entirely
unsuitable product for that household. In fact, on their own both savings and loans could
be unsuitable strategies for such a household that may need an additional capability to
manage income variability. From this example it is clear that the best way for financial
providers to innovate while ensuring that the financial well-being of the customer is not
negatively impacted is by granting the customer the Right to Suitability, which requires
the provider to:
1. Fully understand the products that they offer to their customers.
2. Have a clearly laid out process including a customer due-diligence process which is
Board-approved and demonstrably ensures that if it is followed it does result in the
sale of financial products that are designed to enhance the financial well-being of the
customer. This would go beyond standardised literacy and disclosure methods.
3. Have a process of customer audit that regularly reviews the actual adherence to this
process by the staff of the financial services provider.
4. Accept legally enforceable liability for non-adherence to the process and for gross
negligence in the manner in which it offers products to its customers. There would be
no liability for specific customer outcomes per se.
Global customer protection regulation (such as in Australia and the USA) is steadily
gravitating towards a Suitability based regime and in keeping with this directional shift in
the nature of consumer protection, India should also move towards establishing a Right to
Suitability for customers of financial products and services. Australia, for instance, has
passed the Future of Financial Advice Act 2012, which introduced a duty for financial
advisors to act in the best interests of their clients, subject to a ‗reasonable steps‘
qualification, and to place the best interests of their clients ahead of their own when
providing personal advice to retail clients. In the USA, the CFPB has amended Regulation
Z, which implements the Truth in Lending Act (TILA). Under regulation Z, a creditor is
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Customer Protection: Introduction and Current Approaches
prohibited from making a higher-priced mortgage loan without regard to the consumer‘s
ability to repay the loan. This rule implements sections of the Dodd–Frank Wall Street
Reform and Consumer Protection Act which require creditors to make a reasonable, good
faith determination of a consumer‘s ability to repay any consumer credit transaction
secured by a dwelling.
Suitability also encompasses the ex-post grievance redressal mechanism available to
aggrieved customers and it would be advisable for the institutional mechanism offering
grievance redressal to be common across financial regulators to concentrate expertise and
improve efficiencies. Although there are product or sector specific concerns which would
require specialisation, a common agency that identifies, implements, and tackles
customer protection related concerns in the financial services sector working closely with
sector-specific prudential regulators would be an essential step in ensuring for customers,
ease of access to a one-stop point for all financial services related issues.
While the focus of this discussion is on low income households and small businesses, the
same issues are true even for middle and high-income households and large companies.
Failures of Customer Protection
Even as India has continued to rely on mandated information disclosure and financial
literacy to ensure the best outcomes for customers, the experienced reality for a
significant section of customers indicates that their financial well-being continues to be
compromised on account of the rampant mis-sale of products and services. India has
witnessed significant customer protection failures in the recent past. For instance, it has
been estimated that there has been a loss of about Rs.1.5 lakh crore to investors owing to
mis-selling of insurance over the 2004-05 to 2011-12 period249. Entry loads in mutual funds
is another example that led to mis-sale, where agents got unsuspecting customers to churn
their portfolios in order to cash in on the entry-loads each time the customer bought into
a new mutual fund. A recent example of a large scale customer protection failure is the
case of the Saradha Group. The now defunct Saradha Group is estimated to have received
deposits from about 17 lakh people and about 10 lakh people have so far filed for
compensation250.
The customer protection failures specific to different banking designs are examined in the
following paragraphs:
1. National bank with branches: The RBI has noted on multiple occasions the customer
protection challenges associated with this institutional design. The Damodaran
Committee (2011) notes that banks are ―focusing excessively on achievement of
quantitative targets rather than rendering quality service to select customers after
having carried out the process of due diligence.‖ This highlights the potential for missale or unsuitable sale of products due to conflicted remuneration structures that
place excessive importance on the achievement of sales targets. In a speech251 dated
30 April 2013, Deputy Governor Dr. K.C Chakrabarty noted that ―the product–based
incentives for staff in banks selling insurance products or mutual funds creates
perverse incentives and, thereby, shifts the focus from the customer‘s original need.
The staff is keen on bundling insurance along with term deposits (and in some cases, in
lieu of term deposits) only because of the product-based incentive structures. Sadly,
they lose sight of customer convenience, product suitability and blatantly indulge in
mis-selling.‖ Providing such incentives to bank employees leads them to not act in the
best interest of the customer.
The RBI has also previously observed that some banks follow the practice of
sanctioning housing loans to customers at teaser rates i.e., at comparatively lower
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Customer Protection: Introduction and Current Approaches
rates of interest in the first few years, after which rates are reset at higher rates. This
practice raised a concern as some borrowers found it difficult to service these loans
once the normal interest rate (which is higher than the rate applicable in the initial
years) became effective. The regulator took into consideration the fact that many
banks were not taking the repayment capacity of the customer at higher interest rates
into account at the time of their loan appraisal. Considering the higher risk that these
loans carry as a consequence, the RBI directed banks to increase standard asset
provisioning on the amount outstanding from 0.40 per cent to 2 per cent252.
Many studies have pointed that over-indebtedness of farmers in the Vidarbha region of
Maharashtra have led to detrimental outcomes for farmers253. The financial situation,
existing debts, and cash flows of these farmers were not taken into account by banks
in these cases leading to the unsuitable sale of loans. The Central Government later
announced a debt waiver for farmers in six districts of this region254.
2. National Bank with Agents: Banks in India outsource financial services including
applications processing (loan origination, credit card), document processing, and loan
recovery through Direct Sales Agents and Recovery Agents. As observed by the RBI,
―some banks set very stiff recovery targets or offer high incentives to recovery agents.
These have, in turn, induced the recovery agents to use intimidating and questionable
methods for recovery of dues.255‖ There were also widespread reports regarding
―misrepresentation and misleading information provided by direct selling agents and
marketing agents as also non-fulfilment of such promises made by agents or bank
officials while marketing the products256‖. This led the RBI to remind banks that they
as principals are responsible for the actions of their agents and that ―…their agents
engaged for recovery of their dues should strictly adhere to the above guidelines and
instructions, including the BCSBI Code, while engaged in the process of recovery of
dues.‖
The mis-sale of Unit-Linked Insurance Policies (ULIP) also presents the possibilities of
mis-sale in an institutional design that relies on agents. Certain product features and
misaligned incentive structures encouraged the mis-sale of ULIPs to customers257:
a. ULIPs typically had a lock-in period of three years. If a policy was discontinued
during the lock-in period, companies were allowed to deduct up to 100 per cent of
the value of the policy post costs.
b. Although the ULIP was a long-term (15 year) product, up to 40 per cent of the
commissions from the product could be collected in the first year. This ‗frontloading‘ of commissions offered considerable scope for mis-sale of the product.
The case of mis-sale of ULIP to customers highlights the conflict of interest that arises
as a result of skewed incentive structures to agents. In such cases, agents do not act in
the best interest of their clients and even in the presence of disclosure mechanisms,
the possibility of an unsuitable sale is high.
3. NBFCs: This institutional design has been successfully leveraged in reaching out to
customers in underserved locations and income segments.
There are two main customer protection challenges relating to access to grievance
redressal mechanisms specific to this institutional design. First, since most NBFCs
operate in traditionally underserved areas, customers have limited access to ex-post
grievance redressal mechanisms. Many customers that this institutional design serves
are first-time customers of formal financial services. Their unfamiliarity with formal
services could prevent them from accessing grievance redressal mechanisms. Secondly,
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Customer Protection: Introduction and Current Approaches
the first port of call for these customers is the internal redressal mechanism of the
NBFC while the second port of call is the RBI‘s regional office258. Accessing the second
port of call, in this case, involves substantial costs for these customers and could deter
them from reporting complaints. As mentioned in the vision for customer protection,
such customers must have ease of recourse to ex-post grievance redressal mechanisms.
Analysis of Dominant Approaches to Customer Protection
While India does not have legislation governing customer protection for financial services,
customers have recourse to the consumer courts set up by the Consumer Protection Act,
1986. In addition, consumers of financial products and services may also resort to
mechanisms set up by product and services-specific regulators. With the product-based
regulatory structure, customer protection responsibilities for financial services are
embedded in multiple regulators. India has six primary regulators- RBI, SEBI, IRDA, PFRDA,
EPFO, and FMC. In addition NABARD, SIDBI, NHB are also involved in regulation and
supervision, as subsidiaries of the RBI. As many as six Ministries of the Government of India
and State Governments have an implicit or direct (as in the case of Ministry of Corporate
Affairs) role.
The current regulatory approach to customer protection in India can be divided into two
complementary ex-ante approaches, namely, mandated information disclosure, and
financial literacy and education. These approaches are predicated on the principle of
caveat emptor or ‗buyer beware‘. In addition, there are ex-post mechanisms for grievance
redressal to enable wronged customers to be compensated by financial services providers.
The ex-ante approaches are discussed below, while ex-post mechanisms are discussed in
Chapter 6.3.
Mandated Information Disclosure
Information disclosure is the most popular ex-ante approach to implementing customer
protection because there is a belief that more information enables the customer to reach
a more reasoned decision on buying that product. Dependence of a regime based primarily
on disclosure, such as is the case in India, has been fraught with many limitations. These
can be broadly grouped into the following aspects – the nature of financial products, the
nature of the transaction, the ‗expertise‘ of the buyer to ascertain what she requires, and
whether she is indeed getting what she needs.
In India, all regulators have required information disclosure from institutions regulated by
them. For example, the RBI requires banks and other financial institutions to clearly
disclose material terms on loans. The RBI Guidelines on Fair Practices Code for Lenders259
advises banks to transparently disclose to the borrower:
1. all information about fees and charges payable for processing the loan application;
2. the amount of fees refundable if loan amount is not sanctioned or disbursed;
3. pre-payment options and charges, if any;
4. penalty for delayed repayments if any;
5. conversion charges for switching loan from fixed to floating rates or vice versa;
6. existence of any interest reset clause; and
7. any other matter which affects the interest of the borrower.
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Further, the Fair Practices Code for NBFCs260 mandates the following disclosures in the
loan agreement:
1. all the terms and conditions of the loan;
2. that the pricing of the loan involves only three components: the interest charge, the
processing charge, and the insurance premium (which includes the administrative
charges);
3. that there will be no penalty charged on delayed payment;
4. that no Security Deposit / Margin is being collected from the borrower;
5. that the borrower cannot be a member of more than one SHG / JLG;
6. the moratorium between the grant of the loan and the due date of the repayment of
the first instalment; and
7. an assurance that the privacy of borrower data will be respected.
Other regulators like the IRDA also mandate extensive disclosure requirements of
insurance companies for insurance policies.
Disclosure based regimes hinge on eliminating the information asymmetry between the
customer and the provider. However, studies have shown that disclosure can have the
opposite effect of what is intended. For example, customers are often ‗over-loaded‘ with
information and this leads them to take sub-optimal decisions261. Moreover, mandated
disclosure can crowd out useful information. Since disclosers can proffer, and disclosees
can receive, only a limited amount of information, mandated disclosures effectively keep
disclosees from acquiring other (potentially more useful) information262. Disclosure may
therefore have evolved as a means for providers of financial services to ‗absolve‘
themselves of their fiduciary responsibilities towards their customers, especially in
standard form contracts that exist between providers and retail customers. These
responsibilities are those placed on providers to act in the best interests of their clients,
failing which the transaction would tantamount to a mis-sale. Mandated disclosure can
also cause inequity in customer protection outcomes. For instance, ―mandated disclosure
helps most those who need help least and helps least those who need help most.
Information is most useful to well-educated and well-off people who have the resources
and sophistication to locate, interpret and use the revealed information.263‖ Several
studies264 have found that customer knowledge of credit markets is closely related to
family income and education. In the Indian mutual fund context, studies265 have shown
that ―firms respond to disclosure policy (relating to ‗unshrouding‘ of fees) by altering
products to essentially maintain lack of clarity in pricing.‖ It is estimated that investors in
India lost and mutual fund firms gained approximately Rs. 3,000 crore due to the
shrouding of fees by closed-end mutual funds.
Disclosures have been shown to have limited value in improving customer well-being over
time and across countries, and cannot be the basis for a customer protection framework.
While there are specific benefits to having disclosures for financial services, the
fundamental framework that underpins customer protection cannot be predicated on
putting the onus on the customer. In fact, there needs to be a move in the opposite
direction, requiring more from the financial services provider in ensuring protection of
customers.
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Customer Protection: Introduction and Current Approaches
Financial Literacy and Education
The expectation with this approach has been that over time creating a more financially
literate citizenry will contribute to enhanced decision making as well as improved
financial wellbeing. Regulators in India have promoted financial literacy and education
schemes as mechanisms to improve customer outcomes. For instance, the RBI recently
announced the National Strategy for Financial Education aimed at promoting inclusive
growth, financial inclusion, and financial education. SEBI implements financial literacy
campaigns through the Resource Person (RP) model. Under this model, SEBI trains RPs who
in turn conduct workshops for target groups like school children, young investors, home
makers, SHGs etc. In 2009, RBI initiated the Financial Literacy and Credit Counselling
(FLCC) model with the objective of providing free financial literacy/education and credit
counselling. The specific objectives of the FLCC were the following266:
1. To educate the people in rural and urban areas with regard to various financial
products and services available from the formal financial sector.
2. To make the people aware of the advantages of being connected with the formal
financial sector.
3. To formulate debt restructuring plans for borrowers in distress and recommend the
same to formal financial institutions, including cooperatives, for consideration.
4. To provide financial counselling services including education on responsible borrowing,
proactive and early savings, and offering debt counselling to individuals who are
indebted to formal and/or informal financial sectors.
The RBI encouraged banks to set up trusts or societies for running FLCCs and to induct
respected local citizens on the Board of such a trust or society. The Eastern Area of the
RBI (a region comprised of 12 states and 1 union territory) has 186 FLCCs267.
In June 2012, the RBI modified the FLCC scheme and lead banks were advised to set up
Financial Literacy Centres (FLCs) in each of the Lead District Manager (LDM) Offices268. The
FLCs are expected to impart financial literacy through monthly outdoor camps and
collaboration with local NGOs. As of September 2013, there are 822 FLCs in the country269.
While financial literacy is seen as a way to create ‗empowered‘ customers who would be
sufficiently competent to take the right decisions, many studies have pointed to the weak
relationship between financial literacy and financial behaviour, especially among lowincome households270. For example, a recent meta-analysis of the relationship between
financial literacy and financial behaviour in 168 research papers finds that interventions to
improve financial literacy explain only 0.1 per cent of the variance in financial behaviours
studied, with weaker effects in low-income samples. Like other education, financial
education decays over time. Evaluation studies of financial literacy and education
programs conducted in India provide further evidence of their lack of impact on the
customer. These studies find that even after intensive training sessions (some lasting two
days), there is insignificant or no impact on the customer‘s financial behaviour271.
While building financial capabilities of customers is obviously desirable, it is clear from
the evidence that a strategy for customer protection cannot be built around this
approach. The level of expertise required to understand financial products and services
will always mean that the provider will know more than the customer.
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Chapter 6.2
Suitability as an Approach
When the fact is considered that imbalances in information, expertise, and power
between the buyer and seller of financial products will only be exacerbated in the future,
then it becomes clear that existing approaches to customer protection have severe
limitations. As argued earlier, the ―caveat emptor‖ principle has led to fundamental flaws
in India‘s customer protection architecture and has created large welfare losses for
customers. As the recent examples of customer protection failure in India highlight, there
is a pressing need to shift away from this approach to financial customer protection. There
is a need to move to a customer protection regime where the provider is held accountable
for the service to the buyer, by ascertaining that the products sold or the advice given is
suitable for the buyer considering her needs and current financial situation, i.e. the
customer must have a Right to Suitability.
The RBI has already signalled its intent to proceed along these lines in the Report on Trend
and Progress of Banking in India 2012-13272 where it notes the importance of the Treating
Customers Fairly (TCF) model. The TCF framework however has a number of differences
from the Suitability regime. First, the TCF framework does not impose a legal liability on
the financial services provider to ensure Suitability. Second, the TCF approach talks about
the need to ensure that products and services sold meet the needs of identified customer
groups. The Suitability framework goes a step further and mandates that the provider
ensure that the products meet each customer‘s needs and objectives; not just customer
groups. Third, TCF mandates that Suitability needs to be considered only in the case of
advice given to customers while the Suitability regime requires that both sale and advice
be tied to Suitability requirements. While the adoption of the TCF model by the RBI would
be an important step in shifting away from the caveat emptor approach, progress towards
a Suitability centric regime of customer protection in India would be much more
appropriate.
In this context, it must also be noted that the FSLRC‘s recommendation on customer
protection ―marks a break with the tradition of caveat emptor, and moves towards a
position where a significant burden of customer protection is placed upon financial
firms273.‖ The Draft Code establishes basic rights for financial customers. These include
the right to professional diligence, protection against unfair contract terms, protection
against unfair conduct, protection of personal information, requirement of fair disclosure,
right to redress of complaints, right to suitable advice and protection from conflict of
interest of advisors. It is especially significant that the FSLRC has recommended that retail
customers have the right to receive suitable advice in relation to the purchase of a
financial product or service, and that the provider must collect all relevant information on
the needs and financial situation of the customer in making its recommendation. This shift
in equilibrium, from caveat-emptor to provider-liability, will ensure that financial services
providers compete on the provision of solutions that are appropriate for customer
households (and not just revenue-maximising for the provider), thus aligning the
incentives of the provider with the customer.
Suitability as a Process
Suitability should be viewed as a process of the provider rather than as an outcome for a
customer. Outcomes can be driven by many factors and in most cases it will be near
impossible to specifically assess the extent to which unsuitable provider actions were
responsible for it. Suitability as a process would require every financial services provider
to have a Board approved Suitability Policy that the company must follow in all
interactions with customers – the policy must lay down the processes for customer data
collection, analysis, communication of recommendations (both advice and product sale),
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Customer Protection: Suitability as an Approach
and follow-up. It is the implementation of the Suitability process that should determine if
a financial services provider has indeed acted in the best interests of the customer.
The power of the Suitability approach is that it will be necessary for the financial services
provider to repeat the process on an on-going basis - in every interaction with every
customer. At all points of time, therefore, the financial services provider is incentivised to
follow the Suitability process and act in the best interests of the customer.
As mentioned earlier, financial customer protection regimes in Australia, UK, and USA
have shifted to a provider-liability regime and mandated a process for ensuring Suitability.
For example, in the case of a standard home loan product, regulators in these countries
require that Suitability assessment take into account two parameters- one, the customer‘s
requirements and objectives and two, the customer‘s financial situation. Both parameters
are examined in some detail below.
1. Customer‘s requirements and objectives: The Australian Suitability assessment (under
the Responsible Lending Conduct274) mandates that the financial services provider look
into the following aspects of the customer‘s requirements and objectives:
a. the purpose for which the credit or customer lease is sought and the benefit to
the customer;
b. whether the customer seeks particular product features or flexibility, the
relative importance of different features to the customer, and whether the
customer is prepared to accept any additional costs or risks associated with these
features;
c. the nature of the credit requested by the customer;
d. if the customer has more than one requirement or objective, the relative
importance of each to the customer (e.g. whether the cost of the credit or
flexibility to make later changes is more important to the customer);
e. the customer‘s understanding of the proposed contract; and
f. if the credit is to purchase a specific item, the term of the credit relative to the
likely useful life of the asset
2. Financial Situation of the customer: The Consumer Financial Protection Bureau (CFPB)
regulations mandate that eight underwriting factors should be looked into while
determining the financial situation or ‗ability to repay‘ of the customer. They are:
a. Current income or assets;
b. Current employment status;
c. Credit history;
d. Monthly payment for the mortgage;
e. Monthly payments on other mortgage loans got at the same time;
f. Monthly payments for other mortgage-related expenses (such as property taxes);
g. Other debts; and
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Customer Protection: Suitability as an Approach
h. Monthly debt payments, including the mortgage, compared to your monthly
income (―debt-to-income ratio‖). The lender may also look at how much money
you have left over each month after paying your debts.
The regulations require that monthly payments be calculated based on the highest
payment that will apply in the first five years of the loan and that the customer have a
total debt-to-income (pre-tax monthly income) ratio that is less than or equal to 43
per cent.
The UK Mortgage Conduct of Business Rules require that the firm assume (in the
absence of evidence to the contrary) that any regular payments under a regulated
mortgage contract will be met from the customer's income. A firm should therefore
take account of the customer's actual or reasonably anticipated income, or both and
determine whether the customer intends to, repay, either wholly or partly, from
resources other than income. The Australian regulations deem credit contracts to be
unsuitable if the customer will be unable to meet their payment obligations, either at
all or only with substantial hardship275.
3. Other parameters: Apart from the two parameters described above, certain
regulations like the CFPB guidelines deem certain characteristics of a home loan
product to be ‗globally unsuitable‘ for all categories of customers. For instance, loans
with negative amortisation, interest-only payments, balloon payments, terms
exceeding 30 years and the so-called ―no-doc‖ loans where the creditor does not verify
income or assets are deemed unsuitable for all customers. Products with these
features do not enjoy a ‗safe harbour‘, i.e., the customer can challenge the sale of the
product in court if the customer‘s income and debt obligations left insufficient residual
income or assets to meet living expenses.
In the Indian context, examples of such globally unsuitable products would include
teaser-rate home loans, and ‗no-doc‘ loans, where creditor does not verify income or
assets before lending to the customer.
Further, under ASIC‘s guidelines, Suitability requirements are ‗scalable‘ or more
stringent under certain circumstances. For example, if the potential impact on the
customer of entering into an unsuitable contract is high, i.e., if the size of the loan is
large in comparison to the customer‘s capacity to repay, financial services providers
are expected to conduct extensive inquiries about the customer‘s objectives and
requirements. Similarly, in the case of reverse mortgages, where customers are often
senior citizens, the service provider is expected to make inquiries about the
customer‘s requirements and objectives in relation to certain future needs, including
the possible need for aged care accommodation and whether the customer prefers to
leave equity in their dwelling or land to the customer‘s estate.
Legal Liability
In order for a framework of Suitability to have teeth, there is a need for the imposition of
legal liability on the financial services provider, as this will mean that it is in the firms‘
self-interest to ensure suitable recommendations and product sales to customers.
Every individual and small enterprise must have the right to be provided suitable advice or
recommended suitable products. The interpretation of suitable behaviour is best
determined by the build-up of case laws over time, thus ensuring that the understanding
of Suitability comes from the realities of the financial marketplace and its evolution over
time. The combination of ex-ante legal liability and a strong threat of ex-post
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enforcement provide credible dis-incentives to financial services providers from acting in
ways that promote their own self-interest at the cost of customers. A Suitability
framework underpinned by legal liability is the most effective way of ensuring that the
design and sale of financial services is suitable for the customer.
Australia‘s market conduct regulator, the Australian Securities and Investments
Commission (ASIC) administers the Financial Services Reform Act 2001 (FSR Act), which
requires persons who provide financial product advice to retail customers to comply with
certain conduct and disclosure obligations. The obligations vary depending on whether the
advice given is personal advice or general advice. According to the FSR Act, personal
advice is financial product advice that is directed to a person (including by electronic
means) in circumstances where the provider of the advice has considered (and is
reasonably expected to have considered) one or more of the person‘s objectives, financial
situation and need (all other financial product advice is general advice). All personal
advice must meet the Suitability rule while all general advice must be accompanied by a
―general advice warning‖276.
ASIC also places legal obligations on financial services firms to meet specific conduct,
disclosure, skills as well as professional indemnity insurance requirements, amongst
others, to implement the Suitability requirement. In the case of a breach of law, ASIC is
empowered to take a variety of actions such as:
1. Punitive action such as court order, prison terms, criminal and civil financial penalties;
2. Administrative action (without going to court) such as ban on providing financial
services, revocation, suspension or variation of conditions of licences, public warning
notices;
3. Preservative actions such as injunctions; and
4. Negotiated resolutions such as through enforceable undertakings, and others
ASIC can decide on which remedy to take depending on various factors such as the severity
of the suspected misconduct, the extent of losses, the compliance history of the individual
or firm in question, and so on. The Australian Government has further passed the Future
of Financial Advice Act 2012, which introduced a duty for financial advisors to act in the
best interests of their clients, subject to a ‗reasonable steps‘ qualification, and to place
the best interests of their clients ahead of their own when providing personal advice to
retail clients. To complement this, the Act also introduced a prospective ban on conflicted
remuneration structures including commissions and volume-based payments, in relation to
the distribution of and advice about a range of retail investment products (not applicable
to some products and advice services including general insurance, basic banking products
and for financial product advice given to wholesale clients).
Interpreting Suitability
In Australia, the interpretation of principles of Suitability is dependent on case law. For
example, consider the following case regarding maladministration in the case of a ‗lowdoc‘ loan277. Mr. and Mrs. Z applied for a ‗low-doc‘ loan from a Financial Services Provider
(FSP) for two stated objectives- to refinance an existing loan and to obtain additional
finance of AUD 200,000 to assist them in purchasing property. The FSP approved the loan
based on the income disclosed in the application and a declaration stating that the loan
was within their ability and capacity to service. Mr. and Mrs. Z declared a partnership
income of AUD 400,000, rental income of AUD 40,000, and a parenting allowance of AUD
20,000. The FSP did not make any independent enquiries to verify this information.
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Mr. and Mrs. Z subsequently claimed that the FSP‘s decision to lend amounted to
maladministration as they did not have the capacity to service the additional loan of AUD
200,000. The case manager of the Financial Ombudsman Service (FOS), Australia‘s
external redressal ombudsman, found that the level of income was, at first glance,
inconsistent with an entitlement to a parenting allowance of AUD 20,000. Further, the
case manager obtained from Mr. and Mrs. Z a copy of their partnership tax return
prepared one month prior to their loan application. The tax return revealed a net
partnership income of AUD 45,000. The case manager also found that Mr. and Mrs. Z had
made two previous loan applications in which they had made similar income declarations
(although these loans had not proceeded), and two opportunities to correct their
misquoted income, and failed to do so. As the FSP had failed to make enquiries, the case
manager concluded that the FSP‘s approval of the loan was maladministration in lending.
However, the case manager also took into account the principle of fairness in the
circumstances of the case and the principle of proportionate liability in claims of
misleading conduct, and concluded that Mr. and Mrs. Z should bear two thirds of their loss
and the FSP was responsible for one third of the loss. The FSP disagreed with the case
manager‘s evaluation and appealed against it.
The final decision of the Ombudsman agreed with the case manager‘s assessment. In the
decision, the Ombudsman noted that the common law and the Code of Banking Practices
require an FSP to exercise the care and skill of a diligent and prudent lender in the case of
‗low-doc‘ lending, and arguably a diligent and prudent lender would not rely solely on
information provided by the customer to get a loan. The Ombudsman noted that a
customer‘s self-declaration of financial details does not protect the FSP from having the
loan considered maladministration or unjust if the circumstances were such that the FSP
ought to have made enquiries but chose not to do so. This decision relied on extant case
law and the comments of the trial judge in Permanent Mortgages Pty Ltd v Cook (2006) 278,
where it was ruled that a customer‘s false declaration, whether knowingly or
inadvertently, is a relative factor to be taken into account, but is not decisive, such that
the FSP should avoid liability for maladministration in lending.
The interpretation of Suitability by case law around the world has also reinforced the
notion of Suitability as a process-oriented, not outcome-based approach. For instance,
consider the FOS‘s final decision in a case involving an elderly couple in the UK. Mr. and
Mrs. W, an elderly couple who were both 73 years of age, had built up a corpus of savings
over the years279. They decided to invest some of their money and approached their bank
for some advice. The couple spoke to an investment adviser at the bank. The adviser
enquired about the type of investment the couple sought to make (needs and objectives)
and asked for information regarding their personal circumstances. As part of this process,
the adviser asked them some questions about their health taking their age into account.
The adviser recommended that Mr. and Mrs. W invest GBP 40,000 in a ‗capital guaranteed
multi-index equity bond deposit plan‘ and the couple followed the recommendation.
Under the terms of the investment, the couple were obliged to keep the corpus for six
years to retain the capital guarantee. Unfortunately, Mr. W died just 15 months after the
couple had made the investment. Mrs. W asked the bank to cancel the plan since she felt
that the bank had recommended an unsuitable investment plan for the couple. The bank
disagreed with Mrs. W‘s view that the couple had been given inappropriate or unsuitable
advice and it refused to cancel the plan. It pointed out to Mrs W that the adviser had
recorded their health as ‗good‘ during the fact-finding process that he had gone through
with them. Subsequently, Mrs. W approached the FOS and in her complaint, she pointed
out that her husband had clearly been in poor health when they had taken out the
investment plan – and that such a long-term investment could not have been right for
them and therefore, should not have been recommended.
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On examination of the bank‘s records, the FOS found that Mr. and Mrs. W were not
experienced investors. The FOS took the view that the couple‘s age should also have
prompted the bank to make sure the couple had understood they would not necessarily
receive their investment back in full – if they did not keep the bond for six years. Further,
Mr. W‘s medical records showed that he was using a wheelchair at the time of the sale –
and that given his particular medical history, he had already exceeded his life expectancy
by four years. Using this, the FOS argued that it was unlikely that the couple would have
confirmed that they were both in ‗good health‘ when the adviser had asked them. The FOS
was of the opinion that the bank needed to make further enquires about the couple‘s
health in order to arrive at an accurate picture of their circumstances.
In its final decision, the FOS concluded that the bank had not given the couple appropriate
advice. The bank was required to put Mrs. W in the financial position she would now be in
if she and her husband had left the money where it was in the first place.
These cases highlight the importance of creating timeless principles for the Suitability
process that can be interpreted in specific contexts and reinforces the notion of Suitability
as a process-oriented approach. The first case also serves to underpin the responsibilities
of the customer in a Suitability based regime - for instance, in honestly and accurately
disclosing information about her extant financial situation, and her needs and objectives
to the financial services provider.
Suitability in India
Regulators in India have also established Suitability guidelines for several financial
products and services. For example, the RBI has issued Suitability and Appropriateness
guidelines280 for derivative products. These guidelines mandate that ―market-makers
should undertake derivative transactions, particularly with users with a sense of
responsibility and circumspection that would avoid, among other things, mis-selling. It is
imperative that market-makers offer derivative products in general, and structured
products, in particular, only to those users who understand the nature of the risks
inherent in these transactions and further that the products being offered are consistent
with users' business, financial operations, skill & sophistication, internal policies as well as
risk appetite.‖ Further, market-makers are advised to adopt a Board-approved 'Customer
Appropriateness & Suitability Policy' for derivatives business. It is pertinent to note that
small business have been provided protection under these guidelines.
Several counterparties to derivative transactions have alleged that such transactions were
wagers and have also sought to argue that the transactions did not follow RBI guidelines
requiring that such transactions be undertaken only for risk mitigation. The aforesaid
argument has generally not been entertained by courts. For example, in the case of
Rajshree Sugars and Chemicals Limited v. Axis Bank Limited (AIR 2011 Mad 144), the
company contended that Axis Bank entered into structured products in violation of the
aforementioned guidelines and the Master Circular On Risk Management as the company
did not have a risk management policy in place. The Court held that the contention of the
company could not be maintained since their authorised signatory had signed a Risk
Disclosure Statement that showed that the company was aware of a variety of risks
associated with the deal, such as market risk, basis risk, operational risk and legal,
regulatory and tax risks. The Risk Disclosure Statement also contained an undertaking by
the Company that they will get only into those derivatives transactions as are permitted
by the laws of the country including RBI guidelines. Hence, in conclusion, the bank was
found to have not violated the guidelines.
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Apart from the RBI, other regulators in India have also issued Suitability guidelines. For
example, SEBI‘s Investment Advisers Regulations, 2013 mandates the following Suitability
requirements of investment advisers:
1. ―All investments on which investment advice is provided is appropriate to the risk
profile of the client;
2. It has a documented process for selecting investments based on client‘s investment
objectives and financial situation;
3. It understands the nature and risks of products or assets selected for clients;
4. It has a reasonable basis for believing that a recommendation or transaction entered
into:
a. meets the client‘s investment objectives;
b. is such that the client is able to bear any related investment risks consistent with
its investment objectives and risk tolerance;
c. is such that the client has the necessary experience and knowledge to
understand the risks involved in the transaction.
5. Whenever a recommendation is given to a client to purchase a particular complex
financial product, such recommendation or advice is based upon a reasonable
assessment that the structure and risk reward profile of financial product is consistent
with clients experience, knowledge, investment objectives, risk appetite and capacity
for absorbing loss.‖
IRDA has introduced guidelines for the development and implementation of a Suitability
Index – Prospect Product Matrix by insurance companies. These guidelines are intended to
help direct sales personnel, brokers and agents to recommend products based on the need
and Suitability of customers. These guidelines are currently applicable to all life insurance
policies (Traditional, ULIPs, Pension and Health) sold as individual policies. The Prospect
Product Matrix will indicate the suitable products for a customer on the basis of Life stage
(Single, Married, Married with children, Married with grown-up children or Retirement)
Generic need (Protection (Life), Protection (Health), Goal based savings for wealth
creation, Investment, Income) and Income segment of the customer (Mass, Mass affluent
or HNI).For example, a married person with grown up children will need goal based savings
products, investments and health cover more than life protection products. So the matrix
will indicate 100 per cent Suitability of products intended for goal based savings,
investments and health cover. The insurer will then recommend appropriate products from
its portfolio for this purpose.
Regulating Suitability
An environment where Suitability is at the heart of customer protection will also require
fundamental changes in regulatory approaches and instruments. Regulators in such an
environment should be focussed on creating the rules-of-the-game as opposed to constant
intervention in the functioning of institutions and markets. This would mean that the
regulator sets the ground rules on what it expects in terms of Suitability from financial
services providers, coupled with clear and mandatory guidelines on effective grievance
redressal mechanisms. The regulator should prescribe requirements of Suitability to
ensure that service provider recommendations match the needs of the customers as
expressed and understood at the point of sale in the expert, objective opinion of the
provider. Ideally, the regulator would provide guidance, but not legislate tightly, on the
assessment of Suitability in different product contexts. This would ensure that financial
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services providers are incentivised to continually innovate on products and discover better
models for assessing Suitability.
Beyond the regulatory guidance, there should be no requirement for regulatory approvals
that inordinately delay go-to-market timelines, but regulators could have the opportunity
to respond to new designs in a timely manner. This is to ensure that regulation does not
have a chilling effect upon financial innovation, while at the same time allowing
regulators the leeway of preventing poorly designed products from reaching the market.
Regulators, therefore, need to be non-interventionist to the extent possible so as to avoid
curbing the process of innovation, given its importance to the objective of meaningful
financial inclusion in India. Such a non-interventionist approach to the creation of
products would mean that regulatory oversight would shift towards detailed monitoring
and surveillance of the market place.
For instance, in Australia potential breaches of the law are brought to ASIC‘s notice
through reports of misconduct from the public, through referrals from other regulators,
statutory reports from auditors and the licencees themselves, and through ASIC‘s own
monitoring and surveillance work using regular surveillance visits and mystery shopping
studies, the results of which are shared in the public domain.
It is apparent that only through the creation of an enabling legal and regulatory
framework can the power of Suitability to drive improved customer protection be realised.
However, until a dedicated legislation for customer protection in financial services is
passed, there will be a need to rely on strengthening regulatory action and wherever
relevant, the existing provisions of the Customer Protection Act, 1986.
The RBI should however issue regulations on Suitability, applicable specifically for
individuals and small businesses, to all regulated entities within its purview, i.e., banks,
NBFCs and payment institutions (under Sections 35 A of the BR Act, Section 45 JA of the
RBI Act and Section 38 (2) of the Payments and Settlement System Act, 2007); so that the
violation of such regulations would result in penal action for the institution as
contemplated under the aforesaid statutes through a variety of measures, including fines,
cease-and-desist orders, and modification and cancellation of licences.
These regulations should be applicable specifically for individuals and small businesses
defined under the term ―retail customer‖ by FSLRC. FSLRC defines a retail customer as
―an individual or an eligible enterprise, if the value of the financial product or service
does not exceed the limit specified by the regulator in relation to that product or
service.‖ Further, an eligible enterprise is defined as ―an enterprise that has less than a
specified level of net asset value or has less than a specified level of turnover.‖
All financial firms regulated by the RBI would be required to have an internal process to
assess Suitability of products prior to advising clients with regard to them. It is
recommended that all financial services providers be obligated to have in place adequate
procedures that are approved and monitored by the board of directors. Compliance with
the firm‘s internal process should be embedded in the compensation package of the sales
staff. In the event of a customer complaint, the redress authority would consider whether
the process was adhered to and if so, the same would be a defence or a mitigating factor
for the conduct of the firm281. The RBI would provide the following guidance with regard
to the internal compliance requirements for firms regarding Suitability:
1. The Board should approve and oversee the procedures put in place for Suitability on an
annual basis and attempt to detect and correct any deviations from procedure.
2. The firm would have to carry out a limited due diligence of the customer and put in
place a process to assess the appropriateness of any product offered to a customer
180
Customer Protection: Suitability as an Approach
based on the results of the diligence. With respect to credit, for instance, the firm
could be obliged to check the borrower‘s information from credit bureaus to
determine the current level of indebtedness, make reasonable attempts to determine
the current and projected income of the borrower, financial capacity, objectives and
risk tolerance of the borrower, to determine the repayment capacity of the borrower.
The lender should seek appropriate documentation to evaluate income and the ability
of the borrower to repay given the increasing interest rates of the loan.
3. The requirement to conduct a due diligence should include the requirement to obtain
relevant information about the customer‘s personal circumstances and give advice or
recommendations based on due consideration of the relevant personal circumstances.
If the financial firm finds that the information is inaccurate or incomplete, the
customer must be warned.
4. Any product may be offered to customers upon establishing its Suitability, except
―globally unsuitable‖ products discussed in (13).
5. In the event a consumer chooses to purchase a product considered unsuitable to the
customer, the financial services provider should consider providing written advice to
the customer and seeking acknowledgement from the customer. This should however,
not be misused by the financial services provider.
6. The firm‘s internal rules relating to compensation packages of staff should not create
incentives or otherwise promote inappropriate behaviour. In addition, requirements
relating to Suitability and appropriateness should be embedded into compensation
packages. Accordingly, the compensation packages and incentive structures should not
be based solely on numerical targets but should include qualitative aspects such as
offering appropriate products and services to customers and complying with
requirements of the internal policy relating to Suitability etc.
7. The firms should have internal processes to track compliance with Suitability and an
internal process to detect and correct any deviations from the policy, including
potential disciplinary action and sanctions for the staff for any deviations. This could
include a customer audit committee which reports to the board that is responsible for
determining compliance with the Suitability process and other customer protection
initiatives of the financial services provider.
8. The firm must have internal grievance redressal mechanisms for non-compliance with
process and this should be required to be communicated to customers as well. The
customers, should however be made aware that it is the process that is guaranteed
and not the outcome. An internal grievance redressal process would not, however,
preclude a customer from proceeding against the firm in any other forum.
9. The internal policy and procedure of the board should be communicated across the
organisation and appropriate training programs should be put in place for the staffboth the client facing and the control staff. Such communication should articulate
inter alia (a) the business benefits of having Suitability requirements, (b) the firm‘s
commitment to a zero-tolerance approach to follow the process and (c) the
consequences for the breach.
10. The firms should have a paper trail and record keeping procedures to demonstrate
compliance with its internal procedures which should be available for inspection by the
RBI.
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Customer Protection: Suitability as an Approach
11. Additionally, if gross negligence, fraud or wilful misconduct can be established on the
part of the financial services provider, the adherence to the process will not be
sufficient and the firm would be liable to be penalised regardless of the process.
12. The regulations should additionally protect the firm from penal action in a situation
where the customer may have deliberately misled or misrepresented to the firm, or if
despite reasonable attempts the firm was unable to assess Suitability.
13. In addition, specific products may be deemed as ―globally unsuitable‖ and would not
be eligible to be offered to households or businesses below a certain income threshold
or net worth or individuals above a certain age. Such products should be prescribed by
the RBI and could be amended from time to time based on feedback from customers
and financial services providers.
14. There is a specific set of de minimis products, the offer of which is to be subjected to
a limited application of the Suitability requirements - basic bank accounts, the
universal electronic bank account recommended in the Report and credit below Rs.
5000 subject to ascertaining the income and repayment capacity of the borrower.
However, the Suitability process should definitely apply if an insurance, investment or
derivative product is being offered to a customer, whether on a standalone basis or
bundled along with credit.
In view of the Regulations outlined, a Board approved Suitability Policy of a financial
services firm serving low income households such as IFMR Trust‘s KGFS may look like this:
1. Reasonable steps must be taken to collect detailed information about the current
financial status of its customers. This should include information on assets, liabilities,
income and expenses, in additions to objectives and needs of the customer. The
collection of this information must involve a physical visit to the customer‘s residence.
This information should be updated on an annual basis, or at the time of product
recommendation or sale, whichever is earlier.
2. This information must be input into the customer management system and used to
generate a financial ‗well-being‘ report for each customer which recommends
appropriate products for the customer. The customer must be informed of her
household‘s financial well-being and how specific financial products or services that
she seeks could potentially improve or weaken her financial well-being.
3. It must be ensured that the product or service that is recommended or sold completely
matches the stated requirement of the household.
4. It must be ensured that the customer completely understands the key features of the
specific product that is recommended, and how the product interacts with the existing
financial portfolio of the household. Upon ensuring this, the ‗informed consent‘ of the
customer to enter into the specific financial transaction must be sought in a written
form.
5. It must be ensured that a product that does not match with the stated requirements or
could deteriorate the financial situation of the household, even if demanded by the
customer, is not recommended to the customer. It must be clearly communicated to
the customer that buying an unsuitable financial product could place her household in
financial distress. In the event that the customer wants to disregard this and purchase
the product or service, a signed document stating that the customer understands the
consequences of purchasing the unsuitable product must be obtained.
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Customer Protection: Suitability as an Approach
6. The customer must have ease of recourse to the internal grievance redressal
mechanism of the provider with a toll-free number prominently displayed in all
branches of the provider. In addition, the existence of this mechanism and the
modalities to access it (phone, SMS, e-mail, written complaints) should be clearly
articulated to the customer in the first meeting as well as any subsequent meeting
when there is a product recommendation or sale. The customer must also be informed
of the exact timeline within which she should be able to expect an outcome for
grievances registered. The internal redressal mechanism should look to resolve the
complaint of the customer in an unbiased and speedy manner.
7. The customer should be informed of her right to approach the external redressal
mechanism with details of how to access such mechanism, in the event that she is
unsatisfied with the response of the internal mechanism or if the issue remains
unsolved within a reasonable span of time.
8. A Customer Audit committee will conduct an annual audit to assess compliance with
Suitability provisions, and efficiency of internal grievance redressal mechanism. This
committee will report directly to the Board.
9. Employees will not be incentivised based on quantitative targets or other such targets
that could potentially lead them to adopt practices that are in conflict with the
provisions mentioned above. Instead, the employees will be incentivised to adhere to
provision of suitable products or advice to customers. Employee adherence to the
process of ensuring Suitability will be established through the annual customer audit.
183
Customer Protection: Enforcement
Chapter 6.3
Enforcement
In addition to the ex-ante approaches to customer protection, regulators have stipulated
ex-post redressal mechanisms for customer complaints. India follows a sectoral approach
to grievance redressal and each regulator has set up its own grievance redressal
architecture. For example, the RBI has set up the following hierarchy of ex-post redress
for aggrieved customers of credit:
1. In-house grievance redressal mechanisms set up by banks
2. Office of the Ombudsman, created by RBI under the Banking Ombudsman Scheme282
3. Consumer Courts under the Consumer Protection Act, 1986
4. Courts of law
For customers of securities, SEBI has an online complaint redressal mechanism called SEBI
Complaints Redress System (SCORES). If the issue remains unresolved or resolved
unsatisfactorily in the customer‘s view, she can approach the SEBI Tribunal, which has
exclusive jurisdiction in matters falling under the scope of the SEBI Act to the exclusion of
courts of law and by extension, consumer courts. The Securities Appellate Tribunal (SAT)
forms the forum for first appeal from decisions of the SEBI Tribunal and the second appeal
lies directly to the Supreme Court but only on ‗questions of law‘.
For customers of insurance, IRDA has mandated the setting up of grievance redressal cells
within each of the life and non-life companies under the IRDA (Protection of Policyholders‘
Regulations), 2002. The IRDA Grievance Cell or Director of Public Grievances (in the case
of public sector insurance companies) remains the second port of call, coming into play in
practice only after the customer has sought redress through the in-house grievance cells.
The latter, the Director of Public Grievances entertains complaints against the public
sector insurance companies (including LIC, GIC, United India, National, New India,
Oriental) and is based within the Cabinet Secretariat of the Government of India. The
Insurance Ombudsman, first created by Government of India notification in 1998 can be
approached in case the customer remains unsatisfied. Customers of insurance products
can also appeal to the consumer courts and the civil courts if the complaint persists.
In the case of NPS, the Central Grievance Management System (CGMS) run by NSDL is the
first port of call for customers. Customers can register complaints with the CGMS through
a toll-free number, on the internet and through physical forms available at the PoP. If the
CGMS does not respond to the complaint in 30 days or if the customer is dissatisfied with
the resolution, she can apply to the Grievance Redressal Cell (GRC) of PFRDA.
Table 6.3.1 below summarises the grievance redressal mechanism across financial sector
regulators in India. In general, across the financial sector, all financial institutions are
expected to have an internal grievance redressal mechanism that is the first port of call
for aggrieved customers. Then there are the external redressal mechanisms such as the
ombudsmen in the case of banking and insurance, and the Securities Appellate Tribunal
(SAT) in the case of capital markets. If the customer remains unhappy with the verdict
reached through the external redressal process, she is free to take the case to the
Consumer Courts set up under the Consumer Protection Act of 1986.
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Customer Protection: Enforcement
Table 6.3.1
Grievance Redressal Mechanisms
IRDA
RBI
SEBI
In-house
grievance
redress
SEBI
Redress
(SCORES)
RBI
Banking
Ombudsman
SEBI Tribunal
IRDA Grievance Cell
Securities
Appellate
Tribunal (SAT)
Director
of
Public
Grievances (for public
sector
insurance
companies)
Complaints
System
In-house
redress
The
Ombudsman
Consumer Courts
Supreme Court
Court of Law
grievance
PFRDA
Central Grievance
Management
System, NSDL
Grievance
Redressal
Cell
(GRC) of PFRDA.
Insurance
Consumer Courts
Consumer Courts
Court of Law
Court of Law
The Consumer Court has a three-tier structure- District Forums, the State Consumer
Disputes Redressal Commissions and the National Consumer Disputes Redressal Commission
have been set up at the district, state and national level respectively. A written
complaint, can be filed before the District Consumer Forum for pecuniary value of up to
Rupees twenty lakh, State Commission for value up to Rupees one crore and the National
Commission for value above Rupees one crore, in respect of defects in goods and or
deficiency in service. The Consumer Courts are an alternative to that already available to
the aggrieved customers by way of civil suit. In the case of a complaint/appeal/petition
submitted under the Act, a customer is not required to pay any court fees but only a
nominal fee.
Consumers have also often tried to invoke other regulators to get relief, such as the
Competition Commission of India (CCI). For instance, in a home-loan case, it was alleged
that banks were imposing restrictions on pre-payment of home loan by imposing penalty
on prepayment, which amounted to cartelisation and abuse of dominant position. While in
this case, the CCI held that the levy of prepayment charges was not a uniform practice,
that there was no evidence of action in concert or agreement between banks and that no
effect could be seen on competition as a result of this practice, it is important to note
that the CCI actually heard the case.
Strategies for Monitoring Suitability:
Drawing on international best practices, it is recommended that regulators monitor the
compliance of financial services providers in implementing Suitability employing various
methods, including:
1. On site verification, which can be a very useful approach to assess process compliance
with Suitability norms set out by service providers. This includes process employed at
point of sale through ―mystery shopping‖283.
2. Continuous, ex-post monitoring through information reporting requirements from
service providers such as on incentive and commission structures, financials, customer
complaints and grievance records to assess service provider performance.
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Customer Protection: Enforcement
3. Proactively try to detect violations in the prescribed code of conduct and conduct of
business standards established for such entities through tools such as mystery
shopping, surprise audits, review of compensation packages, staff interviews and
interviews with consumers etc. The Malaysian and Irish Central Banks regularly monitor
compliance with consumer protection regulation through the conduct of mystery
shopping. Existing outreach programs could be used to conduct staff interviews and
interviews with consumers.
4. Investigations of financial services providers in case of regulator suspicions of
malpractice.
Financial Redress Agency
Previous committees such as the Damodaran Committee (2011) have argued for
strengthening of the Banking Ombudsman Scheme through measures like creating internal
ombudsmen in banks, creating public awareness of the scheme, and increasing the number
of offices in the country. However, it could be argued that sector specific redressal
platforms like the BOS are not sustainable alternatives since they suffer from the pitfalls
of a sectoral approach to grievance redressal discussed in the preceding section. As
customers face an integrated portfolio of services especially from financial services firms
that operate in the shadow of regulatory oversight, a sector-specific ombudsman like the
BOS will be unable to act as an effective grievance redressal mechanism.
Keeping with the non-sectoral approach to customer protection, it is recommended that a
unified Financial Redress Agency (FRA) be created as a unified agency for customer
grievance redress across all financial products and services by the Ministry of Finance. This
Agency will be consumer facing and will in turn coordinate with the respective regulator
for customer redress. The Rajan Committee (2009) recognised the need for creating a onestop source of redress for customers in the form of an Office of the Financial Ombudsman
(OFO)284. The Report envisages that the OFO will perform the following functions:
1. Monitor the selling of different products, the degree of transparency about their
pricing, and their Suitability for targeted customers.
2. Act as a neutral forum (and possibly act as an arbitrator) for out-of-court negotiated
settlement of debt.
3. Enhance financial literacy and financial counselling, issues that span regulators
The FSLRC Report also recommends the creation of a new statutory body to redress
complaints of retail customers through a process of mediation and adjudication. The
report envisages that this agency (the FRA) will function as a unified grievance redress
system for the entire financial system and will be independent of all regulators. This
mandates a shift away from the present sector-specific redressal agencies in the form of
the Banking Ombudsman and the Insurance Ombudsman, although customers will retain
the right to approach the consumer court for redress. The report opines that the powers
of the consumer court should be ultimately transferred to the FRA for financial customers
once it acquires the requisite scale and expertise. The report suggests that the FRA be
managed by a board of directors.
Further, as mentioned in Chapter 4.6, a State Finance Regulatory Commission (SFRC) could
be created into which all the existing State Government-level regulators could be merged
and functions like the regulation of NGO-MFIs and local Money Services Business could be
added on. In some states, the SFRC could be created by upgrading existing Institutional
Finance Cells. There is also value in bringing regulatory function close to the enforcement
186
Customer Protection: Enforcement
function under the Economic Offences Wing (EOW), so as to ensure that they are working
closely together. The RBI must be closely involved over a longer time frame in training the
commissioners and licensing and accrediting the Commission itself. The local regional
directors of the RBI could, for example, be ex-officio Chairs of the Commission‘s Board of
Governors while the Commissioner could be a senior State level appointee drawn from the
local Banking community. The District Magistrates would also play an important role in
their respective districts.
Until such time as the FRA is created, existing efforts to strengthen inter-regulatory
coordination must continue as well as between financial sector regulators and CCI.
Continuous Surveillance and Monitoring – Citizen-led Surveillance
Given the size of the unregulated financial services industry in the country and the limited
capacity of regulators, it is inevitable that certain fraudulent financial firms will dupe
customers of their savings or mis-sell products. In most such instances, the regulator
becomes cognizant of the crime much after the damage has been done. In order to
prevent such instances of fraud, a citizen-led approach to surveillance and monitoring
would be useful to consider.
There are several examples of the enforcement and surveillance machinery collaborating
with citizens to prevent crime. For instance, the Economic Offenses Wing of the Tamil
Nadu Police Department with the support of Friends of Police (FoP) and members of the
public has formed a ―FoP Scambusters‖ unit to monitor the hundreds of non-banking
financial institutions in the state. Members of the unit will monitor the activities of NBFCs
and the methods adopted by such operators and report suspicious activity via email, phone
and social media285. The Friends of Police (FoP), modelled on the Los Angeles Community
Policing (LACP) forum, is a Tamil Nadu based grassroots initiative that encourages
members of the public to communally participate in the detection and reporting of crime.
Any member of the public may voluntarily become a ―friend‖ of police on the condition
that she is a citizen and a resident in the same district, is not involved in any civil or
criminal court case, be literate enough to write, and be between the ages of 18 and 70 286.
Members of the FoP Scambusters inform the EOW of unregistered, suspicious or fraudulent
institutions that seek to defraud potential customers. Taking a lead from this, the RBI
should create a system by which any customer can effortlessly check whether a financial
firm is registered with or regulated by RBI. Customers should be able to access this service
by phone, through text-messages or on the internet. Once the FRA comes into being, this
system should be subsumed under the FRA and be available for firms registered under all
regulators.
187
Recommendations Regarding Customer Protection
Chapter 6.4
Recommendations Regarding Customer Protection
6.1
The RBI should issue regulations on Suitability, applicable specifically for individuals
and small businesses, to all regulated entities within its purview, i.e., banks, NBFCs
and payment institutions (under Sections 35 A of the BR Act, Section 45 JA of the RBI
Act and Section 38 (2) of the Payments and Settlement System Act, 2007); so that
the violation of such regulations would result in penal action for the institution as
contemplated under the aforesaid statutes through a variety of measures, including
fines, cease-and-desist orders, and modification and cancellation of licences. These
regulations should be applicable specifically for individuals and small businesses
defined under the term ―retail customer‖ by FSLRC. FSLRC defines a retail customer
as ―an individual or an eligible enterprise, if the value of the financial product or
service does not exceed the limit specified by the regulator in relation to that
product or service.‖ Further, an eligible enterprise is defined as ―an enterprise that
has less than a specified level of net asset value or has less than a specified level of
turnover.‖ All financial firms regulated by the RBI would be required to have an
internal process to assess Suitability of products prior to advising clients with regard
to them. The RBI would provide the following guidance with regard to the internal
compliance requirements for firms regarding Suitability:
a. The Board should approve and oversee the procedures put in place for Suitability
on an annual basis and attempt to detect and correct any deviations from
procedure.
b. The firm would have to carry out a limited due diligence of the customer and put
in place a process to assess the appropriateness of any product offered to a
customer based on the results of the diligence. With respect to credit, for
instance, the firm could be obliged to check the borrower‘s information from
credit bureaus to determine the current level of indebtedness, make reasonable
attempts to determine the current and projected income of the borrower,
financial capacity, objectives and risk tolerance of the borrower, to determine
the repayment capacity of the borrower. The lender should seek appropriate
documentation to evaluate income and the ability of the borrower to repay given
the increasing interest rates of the loan.
c. The requirement to conduct a due diligence should include the requirement to
obtain relevant information about the customer‘s personal circumstances and
give advice or recommendations based on due consideration of the relevant
personal circumstances. If the financial firm finds that the information is
inaccurate or incomplete, the customer must be warned.
d. Any product may be offered to customers upon establishing its Suitability, except
―globally unsuitable‖ products discussed in (m).
e. In the event a customer chooses to purchase a product considered unsuitable to
the customer, the financial services provider should consider providing written
advice to the customer and seeking acknowledgement from the customer. This
should however, not be misused by the financial services provider.
f. The firm‘s internal rules relating to compensation packages of staff should not
create incentives or otherwise promote inappropriate behaviour. In addition,
requirements relating to Suitability and appropriateness should be embedded
188
Recommendations Regarding Customer Protection
into compensation packages. Accordingly, the compensation packages and
incentive structures should not be based solely on numerical targets but should
include qualitative aspects such as offering appropriate products and services to
customers and complying with requirements of the internal policy relating to
Suitability etc.
g. The firms should have internal processes to track compliance with Suitability and
an internal process to detect and correct any deviations from the policy,
including potential disciplinary action and sanctions for the staff for any
deviations. This could include a customer audit committee which reports to the
board that is responsible for determining compliance with the Suitability process
and other customer protection initiatives of the financial services provider.
h. The firm must have internal grievance redressal mechanisms for non-compliance
with process and this should be required to be communicated to customers as
well. The customers, should however be made aware that it is the process that is
guaranteed and not the outcome. An internal grievance redressal process would
not, however, preclude a customer from proceeding against the firm in any other
forum.
i. The internal policy and procedure of the board should be communicated across
the organisation and appropriate training programs should be put in place for the
staff- both the client facing and the control staff. Such communication should
articulate inter alia (a) the business benefits of having Suitability requirements,
(b) the firm‘s commitment to a zero-tolerance approach to follow the process,
and (c) the consequences for the breach.
j. The firms should have a paper trail and record keeping procedures to
demonstrate compliance with its internal procedures which should be available
for inspection by the RBI.
k. Additionally, if gross negligence, fraud or wilful misconduct can be established
on the part of the financial services provider, the adherence to the process will
not be sufficient and the firm would be liable to be penalised regardless of the
process.
l. The regulations should additionally protect the firm from penal action in a
situation where the customer may have deliberately misled or misrepresented to
the firm, or if despite reasonable attempts the firm was unable to assess
Suitability.
m. In addition, specific products may be deemed as ―globally unsuitable‖ and would
not be eligible to be offered to households or businesses below a certain income
threshold or net worth or individuals above a certain age. Such products should
be prescribed by the RBI and could be amended from time to time based on
feedback from customers and financial services providers.
n. There is a specific set of de minimis products, the offer of which is to be
subjected to a limited application of the Suitability requirements - basic bank
accounts, the universal electronic bank account recommended in the Report and
credit below Rs. 5000 subject to ascertaining the income and repayment capacity
of the borrower. However, the Suitability process should definitely apply if an
insurance, investment or derivative product is being offered to a customer,
whether on a standalone basis or bundled along with credit.
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Recommendations Regarding Customer Protection
6.2
The Committee recommends that a unified Financial Redress Agency (FRA) be
created by the Ministry of Finance as a unified agency for customer grievance
redress across all financial products and services which will in turn coordinate with
the respective regulator. The FRA should have a presence in every district in the
country and customers should be able to register complaints over the phone, using
text messages, internet, and with the financial services provider directly, who
should then be required to forward the complaint to the redressal agency. The
customers should have their complaints resolved within 30 days of registration of the
complaint with the FRA.
6.3
The RBI should create a system using which any customer can effortlessly check
whether a financial firm is registered with or regulated by RBI. Customers should be
able to access this service by phone, through text-messages or on the internet. Once
the FRA comes into being, this system should be subsumed under the FRA and be
available for firms registered under all regulators.
190
Section 7
Measurement and Monitoring of Comprehensive Access to Financial Services
Measurement and Monitoring: Introduction and Strategic Direction
Chapter 7.1
Introduction and Strategic Direction
This section provides a framework and recommends strategies for the comprehensive
measurement of financial inclusion and deepening, in order to track progress towards
achieving the desired outcomes by the vision statements outlined in Chapter 2.1. A
systematic measurement and monitoring framework provides crucial feedback loops to
fine-tune strategies and refine policy action continuously as progress is made towards
enhanced access to finance and financial depth.
To get a comprehensive view as mentioned in Chapter 2.2, existing supply-side data that is
available is very limited. More granular data needs to be captured from every access point
of the supply side. In addition, this data needs to be complemented from the demand side
through representative consumer surveys to measure usage and affordability.
The following table summarises the monitoring strategies to be adopted to measure the
progress towards achieving the goals outlined in Chapter 2.1.
#
Vision
1
A Universal
Electronic
Bank Account
2
Ubiquitous
Access to
Payment
Services and
Deposit
Products at
Reasonable
Charges
Table 7.1.1
Summary of Measurement Strategy
Goal
Desired
Current Status
Outcome
Each Indian
100% by All India 36% with
resident, above
January 1,
Urban India 45%;
the age of 18
2016
and Rural India
32%
Full services
access point
within a fifteen
minute walking
distance from
every
household in
India
Reasonable
Charges
3
Sufficient
Access to
Affordable
Formal Credit
Density of 1
per sq.km
with
population of
400 people,
across the
country by
January 1,
2016
Reasonable
charges
Measurement Strategy
Granular reporting of
unique savings bank
account data by all banks
at each transaction point.
Density ranges
from 89% in
Urban Districts
and 3% in Rural
Districts,
calculated at a
district level
Spatial analysis using geolocation data of payment
network collected at each
transaction point.
Charges range
from 0% to 5% for
different classes
of customers
Data on charges of
payment access points
from representative
survey of consumers.
At least one
product with
positive real
returns
Credit to GDP
Ratio in every
District of India
to cross 10%
By January 1,
2016
None; the best
available rate is
-1.95%
Data on rates of interest
of bank accounts.
100% of
districts by
January 1,
2016
94% of the Urban
Districts and 30%
of the Rural
Districts
District level aggregated
credit data from granular
supply side reporting (geolocation data) by formal
credit providers collected
at each transaction point.
Credit to GDP
Ratio in every
District of India
to cross 50%
100% of
districts by
January 1,
2020
18% of the Urban
Districts and 2%
of the Rural
Districts
GDDP data collected by
the respective State
Planning Commissions to
be aggregated by the
Planning Commission of
India.
193
Measurement and Monitoring: Introduction and Strategic Direction
4
Universal
Access to a
Range of
Deposit and
Investment
Products at
Reasonable
Charges
Credit to GDP
Ratio for every
―significant‖
sector of the
economy to
cross 10%
100% of
―significant‖
sectors by
January 1,
2016
All sectors
(agriculture,
industry and
services) appear
to have crossed
this limit
however there
are important
sub-sectors that
have not, such as
Marginal, Small,
Medium and
Large Farmers
and Services
MSMEs.
Credit to GDP
Ratio for every
―significant‖
sector of the
economy to
cross 50%
100% of
―significant‖
sectors by
January 1,
2020
Only Industry as a
broad sector has
crossed this limit.
Convenient
Access
Density of 1
per 10,000
people, across
the country,
by January 1,
2016
Affordable
Rates
Ordinal by risk
level in the
long-run after
adjusting for
―reasonable‖
transactions
charges
100% of
districts by
January 1,
2016
99% in Urban
Districts and
92% in Rural
Districts,
calculated at a
district level.
Excluding PACS,
rural access
drops to 59%.
Very high levels
of violations of
ordinality within
the formal
system and in the
economy as
whole
99% of the Urban
Districts and 36%
of the Rural
Districts
100% of
districts by
January 1,
2020
35% of the Urban
Districts and 4%
of the Rural
Districts
Deposit &
Investments to
GDP Ratio in
every District
of India to
cross 15%
Deposit &
Investments to
GDP Ratio in
every District
of India to
cross 65%
BSR of RBI and Planning
Commission data.
Spatial analysis using geolocation data of formal
credit providers collected
at each transaction point.
Data on cost by source of
borrowing from a
representative survey of
consumers.
District level aggregated
savings & investment data
from granular supply side
reporting (geo-location
data) by providers of
formal savings &
investment products
collected at each
transaction point.
GDDP data collected by
the respective State
Planning Commissions to
be aggregated by the
Planning Commission of
India.
194
Measurement and Monitoring: Introduction and Strategic Direction
5
6
Universal
Access to a
Range of
Insurance and
Risk
Management
Products at
Reasonable
Charges
Right to
Suitability
Reasonable
Charges
Reasonable
charges
Charges range
from 0% to 11.9%
for different
amounts and for
different
products.
No data
Data on fees & charges
relating to investment
products from
representative survey of
consumers.
Total Term Life
Sum Assured to
GDP Ratio in
every District
of India to
cross 30%
100% of
districts by
January 1,
2016
Total Term Life
Sum Assured to
GDP Ratio in
every District
of India to
cross 80%
100% of
districts by
January 1,
2020
No data
GDDP data collected by
the respective State
Planning Commissions to
be aggregated by the
Planning Commission of
India.
Reasonable
Charges
Reasonable
charges
Charges range
from 2% to 15%
on different
products
Data on premiums and
charges (not including
premiums) from
representative survey of
consumers.
All financial
institutions to
have a Board
approved
Suitability
Policy.
100% of
financial
institutions by
January 1,
2015
This is not
required or
present in any
institution today.
Data on grievance
redressal from external
grievance redressal
mechanism such as the
FRA or from the Banking
Ombudsman, SEBI, and
IRDA.
Presence of
district level
redressal
offices for all
customers
availing any
financial
service
100% of
districts by
January 1,
2016
There are 15
offices of the
Banking
Ombudsman
covering the
entire country
today
Geo-location of all
physical locations of all
district level offices.
District level aggregated
data from granular supply
side reporting (geolocation data) by formal
insurance providers
collected at each
transaction point.
195
Measurement and Monitoring: Payments and Savings
Chapter 7.2
Ubiquitous Electronic Payments Network and Universal Access to Savings
Vision 1: Universal Bank Account: By January 1, 2016 each Indian resident, above the age
of eighteen years, would have an individual, full-service, safe, and secure electronic bank
account.
A major drawback of the number of savings bank accounts reported by the RBI Basic
Statistical Returns tables is that it does not factor uniqueness287. In order to gain a more
accurate picture of universal bank account holdings, a measure of unique full service bank
accounts needs to be constructed and reported at the end of each quarter. In view of the
complexities associated with measuring unique accounts, there is a need to track unique
accounts within banks. As a caveat, these metrics do not factor multiple account holdings
across different banks. However, they represent an effective ―upper bound‖ measure of
unique bank account holdings. A nationally representative demand-side survey, as
proposed in Chapter 7.7, would provide an estimate of the adjustment factor for crossbank multiple accounts so that unique bank account holdings may be estimated.
In order to obtain this data, the underlying transaction point data from individual banking
institutions would need to be gathered using a geo-location collection and mapping
strategy as described in Chapter 7.6 and be aggregated to report the district level
penetration data for unique bank accounts.
Vision 2: Ubiquitous Access to Payment Services and Deposit Products at Reasonable
Charges: By January 1, 2016, the number and distribution of electronic payment access
points would be such that every single resident would be within a fifteen minute walking
distance from such a point anywhere in the country. Each such point would allow residents
to deposit and withdraw cash to and from their bank accounts and transfer balances from
one bank account to another, in a secure environment, for both very small and very large
amounts, and pay ―reasonable‖ charges for all of these services. At least one of the
deposit products accessible to every resident through the payment access points would
offer a positive real rate of return over the consumer price index.
1. Granular distribution: Presently available statistics of the payment access point
network (which includes the bank branches, BC outlets, ATMs, and POS terminals)
show significant spatial variations at the state and region levels. However, for a much
more granular measurement of progress towards the vision on ubiquity of payment
architecture, it would be important to track physical presence of payment points in
every sq. km. with a population of at least 400 people in each district in terms of the
following metrics288:
a. Number of 1 sq. km. patches with a population greater than 400 people
b. Geo-spatial location of each payment point
c. Coverage ratio: Number of contiguous 1 sq. km. patches having a population of
at least 400 with at least one payments point, as a ratio of the total number of
contiguous 1 sq. km. patches with population of at least 400 in the district
The underlying data should be collected using a geo-location collection and mapping
strategy as described in Chapter 7.6.
2. Reasonableness of fees: In order to assess the reasonableness of fees associated with
payment services, a representative consumer survey would need to be undertaken
every year that would provide an estimate of the usage and the fees associated with
196
Measurement and Monitoring: Payments and Savings
usage of payment points. The representative consumer survey, as outlined in Chapter
7.7 will collect information on the following parameters:
a. Transaction frequency in a typical month by types of services offered (deposit,
withdrawal, payments, and remittances)
b. Cost of usage of payment access points for deposit, withdrawal, payments, and
remittances
3. Instances of denial: Physical presence of payment access points is a necessary
condition for ubiquitous access, but it is also important to track whether citizens are
experiencing denial of services at these points. Data on instances of denial of payment
service by the provider and reasons for denial of services need to be collected using a
representative consumer survey described in Chapter 7.7. Based on the survey output,
the Committee recommends reporting the following data for each financial year:
a. Total number of denials
b. Reasons for denial (related
interoperability)
to
technology,
cash,
service,
fee,
or
In addition to the task of mandatory reporting of savings bank account data at the
transaction points, reporting the following additional data can provide important insights
in assessing the progress towards universal account holding (Vision 1).
1. Active accounts: Recognising the importance of usage in addition to the access to such
accounts, the Committee recommends reporting and tracking ―active‖ accounts as
defined by a frequency of usage metric. Presently, the G20 Financial Inclusion
Indicators as recommended by the Global Partnership for Financial Inclusion (GPFI)
defines high frequency accounts as those recording 3 or more debit transactions in a
month289. This data is presently captured by the World Bank‘s Global Findex database,
which tracks the financial inclusion data of 188 countries290. A lower frequency of
transactions can also signify activity and thus active accounts may be defined as those
with at least 3 debit transactions per quarter. Tracking inactive bank accounts would
also be useful.
2. Accounts of Low income households and small businesses: To capture the progress of
universal account holding among low income households and small businesses, banking
institutions would need to report the unique account data disaggregated for low
balance accounts (Rs. 1,000 or less), Direct Benefit Transfer (DBT) recipients, and
Current Accounts. All of these would be tracked for every district at a quarterly
frequency.
3. Additional Coverage ratios: It would also be important to measure and report coverage
ratios of these metrics by the individual institutions for each district at a quarterly
frequency, where the definitions of the coverage ratios are provided in Table 7.2.1.
Metric
Unique
Unique
Unique
Table 7.2.1
Coverage Ratio Definitions
Ratio
bank accounts
# of unique accounts/eligible population (aged 18
and above)
& active bank accounts # of unique & active accounts /# of unique bank
accounts
low balance accounts
# of unique accounts with an average balance of
up to Rs. 1,000 /#of unique bank accounts
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Measurement and Monitoring: Payments and Savings
Unique and active low balance
accounts
Unique DBT recipients
Unique
and
active
DBT
recipients
Unique current accounts
Unique & active current
accounts
# of unique & active accounts with an average
balance of up to Rs. 1,000 /# of unique and active
bank accounts
# of unique DBT accounts/# of unique bank
accounts
# of unique & active DBT accounts/# of unique
and active bank accounts
# of unique current accounts/# of businesses
# of unique & active current accounts/# of unique
current accounts
Banking institutions should report these ratios at the branch level so that the district
level aggregated data can be generated using the geo-location collection and mapping
strategy as described in Chapter 7.6.
198
Measurement and Monitoring: Credit
Chapter 7.3
Sufficient Access to Affordable, Formal Credit
Vision 3: Sufficient Access to Affordable Formal Credit: By January 1, 2016, each lowincome household and small-business would have ―convenient‖ access to formally
regulated lenders that have the ability to assess and meet their credit needs, and offer
them a full-range of ―suitable‖ credit products, at an ―affordable‖ price. By that date,
each District and every ―significant‖ sector (and sub-sector) of the economy would have a
Credit to GDP ratio of at least 10 per cent on January 1, 2016. This ratio would increase
every year by 10 per cent with the goal that it reaches 50 per cent by January 1, 2020.
1. Physical presence of formal lenders: To assess the progress of extending the network
of formal lenders (Bank and NBFC branches) in every Gram Panchayat and urban centre
with a population of 10,000, the Committee recommends the tracking of the physical
presence of formal and active credit providers in every contiguous 25 sq. km. patch291
for each district in every quarter. An ―active‖ credit provider should have disbursed at
least one loan per month. The following metrics need to be tracked:
a. Number of 25 sq. km. patches having a population of at least 10,000 people
b. Geo-spatial location of each credit access point
c. Coverage ratio: Number of contiguous 25 sq. km. patches having a population of
at least 10,000, with at least one formal, physically present, and active credit
provider as a ratio of the total number of contiguous 25 sq. km. patches with
population of at least 10,000 in the district
The underlying data should be collected using a geo-location collection and mapping
strategy as described in Chapter 7.6.
2. District-level Credit Depth: In order to assess the depth of credit, the following credit
depth metrics for each district based on total credit outstanding statistics (from the
Basic Statistical Returns data of the RBI) and the respective GDDP data (to be obtained
from the data reported by State Planning Commissions) and should be reported in the
form of the following metrics:
a. Quantum of credit outstanding in district
b. District GDP
c. District level Credit Depth defined as the ratio of quantum of credit outstanding
in district to district GDP
3. Sectoral Credit Depth: In order to assess the depth of credit outstanding to the various
sectors/sub-sectors of the economy, the Committee recommends the following
sectoral metrics be tracked and reported:
a. Quantum of credit outstanding for each sector or sub-sector of the economy
that contributes more than 1 per cent to national GDP
b. Sector GDP for each sector or sub-sector of the economy that contributes more
than 1 per cent to national GDP
c. Sectoral Credit Depth defined as the ratio of credit outstanding to each sector
or sub-sector relative to its respective sectoral GDP
The statistics published by the Planning Commission of India will be the source of the
sectoral GDP data. The underlying credit data should be collected using a geo-location
collection and mapping strategy as described in Chapter 7.6. It is noteworthy that the
sectoral disaggregation as presently reported by the RBI does not match with the
199
Measurement and Monitoring: Credit
sectoral disaggregation as followed by the Planning Commission. Hence, to resolve the
issue of non-comparability, it is desirable that RBI should adopt the Planning
Commission‘s sectoral break up for reporting sectoral credit data.
4. Cost of credit: In addition to ensuring convenient and sufficient access to formal
credit, it is also important to ensure that the formal credit is available at a rate which
is affordable to low income households and small businesses. The metrics
recommended for assessing the cost of formal credit are as follows:
a. Average nominal interest rates charged by formal lenders (banks, NBFCs) to
households for following categories: consumption smoothing or emergency
(unsecured and secured), education, housing, and crop loans
b. Average nominal interest rates charged by formal lenders (banks, NBFCs) to
small businesses for the following loans: short term, long term, and working
capital loans
A nationally representative consumer survey should be undertaken to collect the
underlying data, as described in Chapter 7.7.
The following additional data should also be reported so as to gain deeper insights on the
penetration of formal credit into low income households and small businesses.
1. Distribution of credit accounts: In order to assess the distribution of credit accounts as
a measure of access to credit, it should be required that the following metrics
aggregated at the district level be tracked for every quarter:
a. Total number of outstanding credit accounts by size (up to Rs. 50,000, Rs.
50,000 to Rs. 1,00,000, Rs. 1,00,000 to Rs. 2,00,000 and above Rs. 2,00,000)
2. Types of products offered: For tracking whether formal lenders are offering credit
products to cater to various needs of the customers, the following metrics aggregated
need to be tracked at the district level for every quarter:
a. Total number of formal and physically present lenders (banks, NBFCs) offering
loans to households for following categories: consumption smoothing or
emergency (unsecured and secured), education, housing, and crop loans
b. Total number of formal and physically present lenders (banks, NBFCs) offering
loans to small businesses for the following categories: short term, long term,
and working capital loans
The underlying data should be collected using a geo-location collection and mapping
strategy as described in Chapter 7.6.
3. Performance of credit: In order to assess the performance of credit, the following
metrics should be tracked and reported across bank branches and NBFC outlets in each
district and each sector (and sub-sector):
a.
b.
c.
d.
e.
Number of non-performing assets
Quantum of gross non-performing assets
Ratio of gross non-performing assets to gross advances
Quantum of net non-performing assets
Ratio of net non-performing assets to net advances
200
Measurement and Monitoring: Credit
The underlying data should be collected using a geo-location collection and mapping
strategy as described in Chapter 7.6.
201
Measurement and Monitoring: Investment and Risk Management
Chapter 7.4
Universal Access to Investment and Risk Management Products
Vision 4: Universal Access to a Range of Deposit and Investment Products at Reasonable
Charges: By January 1, 2016, each low-income household and small-business would have
―convenient‖ access to providers that have the ability to offer them ―suitable‖ investment
and deposit products, and pay ―reasonable‖ charges for their services. By that date, each
District would have a Total Deposits and Investments to GDP ratio of at least 15 per cent.
This ratio would increase every year by 12.5 per cent with the goal that it reaches 65 per
cent by January 1, 2020.
1. Investment Depth: In order to assess investment depth, the provider specific total
deposit and investment data needs to be aggregated at the district level and collated
against the GDDP data to produce the following metrics:
a. Quantum of total deposits and financial investments in district
b. District GDP
c. District level Investment Depth defined as the ratio of quantum of total
deposits and financial investments in district to district GDP
Deposit and investment data be collected using a geo-location collection and mapping
strategy as described in Chapter 7.6 and the GDDP data be collected from the State
Planning Commissions.
2. Costs of Investment products: In order to assess whether the formal financial services
providers are offering investment products at a ―reasonable cost‖, it is essential to
collect data on various costs that consumers incur while investing in mutual funds,
pension funds, endowment products offered by insurance providers, equity, and bonds.
These metrics related to the cost of investment products should be reported using a
representative consumer survey as described in Chapter 7.7.
Vision 5: Universal Access to a Range of Insurance and Risk Management Products at
Reasonable Charges: By January 1, 2016, each low-income household and small business
would have ―convenient‖ access to providers that have the ability to offer them ―suitable‖
insurance and risk management products which, at a minimum allow them to manage risks
related to: (a) commodity price movements; (b) longevity, disability, and death of human
beings; (c) death of livestock; (d) rainfall; and (e) damage to property, and pay
―reasonable‖ charges for their services. By that date, each District would have a Total
Term Life Insurance Sum Assured to GDP ratio of at least 30 per cent. This ratio would
increase every year by 12.5 per cent with the goal that it reaches 80 per cent by January
1, 2020.
1. Term Life Insurance depth: In order to assess the sufficiency of term life insurance
access, the following metrics should be aggregated at the district level from each
access point of each service provider:
a. Quantum of term life sum assured in district
b. District GDP
c. Ratio of term life sum assured in district to district GDP
The underlying insurance sum assured data should be collected using a geo-location
collection and mapping strategy as described in Chapter 7.6, while the GDDP data
should be collected from the State Planning Commissions.
202
Measurement and Monitoring: Investment and Risk Management
2. Insurance costs: In order to assess costs of accessing insurance products, the following
data needs to be collected in the representative customer survey:
a. Term Life insurance premium paid
b. Other costs incurred in addition to the premium
The following additional data should also be reported so as to gain deeper insights on the
penetration of deposit and investment products:
1. Types of deposit and investment products offered: For tracking whether the formal
financial services providers are offering deposit and investment products to cater to
various short, medium and long term goals of the customers (Vision 4), there is a need
for quarterly tracking of the following metrics aggregated at the district level:
a. Total number of formal and physically present financial services providers
(Banks, BCs, and NBFCs) offering one or more the of following product
categories: Mutual Funds, Pension funds, Insurance with endowment plans,
Equity, Bonds, and Derivatives
This data should be collected using a geo-location collection and mapping strategy as
described in Chapter 7.6.
2. Types of products offered: For assessing whether the formal financial services
providers are offering insurance products sufficient to cater to various risk
management needs of the customers and businesses (Vision 5), there is a need for
quarterly tracking of the following metrics aggregated at the district level:
a. Total number of formal and physically present financial services providers
offering the following insurance products to manage risks relating to:
commodity price movements; longevity, disability, and death; death of
livestock; rainfall; and damage to property
This data should be collected using a geo-location collection and mapping strategy as
described in Chapter 7.6.
203
Measurement and Monitoring: Customer Protection
Chapter 7.5
Customer Protection
Vision 6: Right to Suitability: Each low-income household and small-business would have a
legally protected right to be offered only ―suitable‖ financial services. While the customer
will be required to give ―informed consent‖ she will have the right to seek legal redress if
she feels that due process to establish Suitability was not followed or that there was gross
negligence.
1. Existence of Board approved Suitability Policy: In order to track the existence of Board
approved Suitability Policy at every financial institution, there is a need to track the
number of financial institutions with a Board approved Suitability Policy.
2. Presence of district level redressal offices: In order to track the presence of districtlevel redressal offices for all customers availing any financial service, there is a need
to track the number of districts with at least 1 grievance redressal office for banking
services, credit products, investment products, and insurance products
In order to gain a more comprehensive perspective of customer protection, there is a need
to measure and monitor the following grievance redressal metrics from the Banking
Ombudsman, SEBI, and IRDA. Based on the approach of Australia‘s Financial Ombudsman
Service (FOS), Table 7.5.1, while not exhaustive, illustrates the kind of information that
needs to be tracked and reported by the respective regulator292.
204
Measurement and Monitoring: Customer Protection
Type of issue cited
by customer
Table 7.5.1:
Customer Grievance Redressal
Type of resolution
If external, ruling of the grievance
authority
Resolved by Resolved by Under
Failure to Action
Failure to
agreement
the
processing disclose
arising
establish
(internal)
grievance
critical
from
Suitability
redressal
feature of conflict
process
authority
the
of
(external)
product
interest
redressal
Failure to
follow
Suitability
process
Penalty imposed by grievance
redressal authority
Amount
Revocation Restriction
of
of licence
of services
financial
penalty
(Rs.)
I was charged an
excessive amount
for the financial
product/service
I experienced
financial distress
because my
expectations did
not materialise
I experienced
financial distress
because I was
misinformed about
the product
I did not need the
product/service
but was tricked
into buying it
Product exclusion
criteria was not
properly explained
to me
205
Measurement and Monitoring: Supply Side Strategy
Chapter 7.6
Supply Side Strategy
All formal providers of financial services to households and small businesses should report the
following data on a quarterly basis about every access point i.e. branches, outlets, BCs, ATMs,
and POS terminals, as applicable.
Table 7.6.1
Data Requirement
Location
A Universal
Bank Account
Electronic
Ubiquitous
Access
Payment
Services
Deposit
Products
Reasonable Charges
to
and
at
Sufficient
Access
to
Affordable Formal Credit
Universal Access to a
Range of Deposit and
Investment Products at
Reasonable Charges
1. Geo-coordinates (latitude and longitude in degrees, minutes, and
seconds)
2. District
3. Number of accounts (#)
4. Number of unique accounts (#)
5. Number of active (with at least 3 debit transactions in a quarter)
unique accounts (#)
6. Number of active accounts with average balance of up to Rs.
1,000 (#)
7. Number of active DBT recipients (#)
8. Number of active current accounts (#)
9. Number of unique inactive accounts (#)
10. Services offered (Y/N): Deposits; Withdrawals; Transfers; and
Remittances
11. Number of transactions (#):Deposits; Withdrawals; Transfers;
Remittances; and Total
12. Quantum of deposits (Rs.): Savings account; Current account;
Term deposits; and Total
13. Services offered (Y/N):
a. Household: Crop; Consumption smoothing; Housing; and
Education
b. Small business: Short-term; Long-term; and Working
Capital
14. Number of accounts (#)
a. Loans to household by category: Crop; Consumption
smoothing; Housing; Education
b. Loans to household by size: Up to Rs. 50,000; Above Rs.
50,000 up to Rs. 1,00,000; Above Rs. 1,00,000 up to Rs.
2,00,000; Above Rs. 2,00,000
c. Loans to small business: Short-term; Long-term; and
Working Capital
d. Total
15. Quantum of credit outstanding (Rs.)
a. Sector/sub-sector deployed (categories according to the
Planning Commission)
16. Quantum of non-performing assets (Rs.)
a. Total net
b. Total gross
17. Ratio of non-performing assets (%)
a. Gross NPAs as a percentage of gross advances
b. Net NPAs as a percentage of net advances
18. Services offered (Y/N): Mutual funds; Pension funds; Insurance
with endowment plans; Equity; Bonds; and Derivatives
19. Quantum of investments (Rs.): Mutual funds; Pension funds;
Insurance with endowment plans; Equity; Bonds; Derivatives
206
Measurement and Monitoring: Supply Side Strategy
Universal Access to a
Range of Insurance and
Risk Management Products
at Reasonable Charges
Right to Suitability
20. Insurance and risk management services offered - products to
manage risk related to (Y/N): Commodity price movements;
Longevity, disability, and death; Death of livestock; Rainfall;
Damage to property
21. Number of Term Life insurance policies outstanding (#)
22. Quantum of Term Life sum assured (Rs.)
23. Existence of Board approved Suitability Policy (Y/N)
24. Presence of grievance redressal offices at the district level (to be
reported by the respective regulator) for: Banking services; Credit
products; Investment products; and Insurance products
Data verification: In addition, this data should be verified periodically by the RBI using
standardised quality control and follow up visits conducted by trained enumeration field
teams within randomly selected sub samples.
Coordination among various regulators for collecting data: The task of reporting additional
granular level of supply side data require systematic coordination among various regulators
such as the RBI, SEBI, IRDA, PFRDA etc. The RBI should take the initiative to ensure that the
reporting requirements of various entities under these regulators are smoothly met and the
relevant data be shared seamlessly.
Geo-spatial mapping: The geo-location data for every financial services access point should be
additionally presented in the form of an interactive national map293. The presence of every
financial services access point will allow the regulator to gain a spatially granular sense of the
number of payment points and formal lenders in every sq.km. of the country. Furthermore,
this data can be overlaid with a population density layer which can be obtained readily using
sources such as AsiaPop294 or created using demographic data from the latest Census, thus
enabling the creation of a picture of the density of access points relative to population. The
district-level depth of credit, investment, and insurance should also be presented using the
mapping framework.
207
Measurement and Monitoring: Demand Side Strategy
Chapter 7.7
Demand Side Strategy
There is a need for the collection of data through nationally representative surveys of
consumers to gain a more accurate picture of progress towards achieving the desired
outcomes outlined by the vision statements. While this strategy seeks to measure access,
usage, and affordability of financial services, the measurement and assessment of financial
outcomes of households is beyond its scope.
The Committee recommends undertaking two types of consumer surveys:
1. Financial Access & Usage Survey: A nationally representative survey of consumers
undertaken annually to collect data on access and usage of financial services
2. Cost & Return Survey: A nationally representative survey of consumers undertaken
triennially to collect data on
a. Cost & sufficiency of formal credit; and
b. Cost of investment products & returns from investment products.
Financial Access & Usage Survey:
It is envisaged that the bulk of the monitoring data will be based on the granular data to be
shared by the financial institutions. However, it is also useful to collect information on access
and usage of formal financial services from the consumers to complement supply side
statistics. Specifically, the Committee recommends that the following metrics need to be
captured from the demand side at an annual frequency.
1. Universal bank accounts:
a. Percentage of customers with a unique bank account
b. Usage of bank accounts
c. Major barriers to usage
2. Access and usage of payments points:
a. Distance to the nearest payment access points
b. Use of various types of services at the payment access points and the respective
charges & fees that consumers incur
c. Incidences of denials to access to the payment points
3. Access
a.
b.
c.
to formal lenders and usage of formal loan
Distance to the nearest formal lender
Types of credit products available
Usage of credit products
4. Access to formal savings and investment and usage of savings & investment product:
a. Types of savings and investment products available
b. Usage of savings & investment products
5. Access to formal insurance products and usage of insurance products:
a. Types of insurance products available
b. Usage of insurance products
208
Measurement and Monitoring: Demand Side Strategy
Strategies for Undertaking Financial Access & Usage Survey: One strategy for collecting the
nationally representative demand side data on access and usage of financial products at an
annual frequency could be to incorporate additional modules in nationally representative
surveys that are being undertaken for other purposes by institutions such as the National
Sample Survey Organisation (NSSO) and the Centre for Monitoring Indian Economy (CMIE).
The NSSO adopts a robust sampling strategy to undertake representative sample surveys for
collecting data on various socio economic indicators. However, NSSO does not generally
undertake a sample survey every year, and thus, might not be an ideal source for monitoring
annual progress. CMIE, on the other hand, undertakes a survey of over 150,000 households
every quarter covering 312 cities and 98 rural regions in India collecting data on household
income, household expenses, pattern of expenditure, household savings and investments, the
pattern of investments, borrowings and the sources and uses of the borrowings. Given that
this survey (known as Consumer Pyramids295) has a fairly extensive coverage, and undertaken
every quarter, it could become a potential source for implementing the annual financial
access surveys as recommended by the Committee.
Cost & Return Survey:
Affordability of formal financial services plays a critical role in ensuring that low income
households and small businesses can adopt formal financial products that are made available
to them by financial inclusion initiatives. Assessing the price that customers pay to avail
various formal financial products should thus become an integral part of the monitoring
framework. However, the task of assessing the cost of various financial products from the
consumers requires undertaking in-depth surveys designed to understand affordability of
formal finance including the sticker price, transaction costs and other fees and charges.
At the same time, it is also important to track whether low income households and small
businesses have access to formal investment products that offer them real returns. Thus, it is
also essential to collect data on the real (inflation adjusted) return on investment that low
income households and businesses gain from formal investment using demand side data.
Towards these objectives, the Committee recommends undertaking an in-depth demand side
survey which will assess the cost of financial products as incurred by low income households
and small businesses and estimate the returns offered by the available formal investment
products. It is suggested that the methodology adopted for collecting the data on costs of
formal financial services and returns offered by investment products should be academic in
rigour to produce data of highest quality. Specifically, the Committee recommends that the
following metrics need to be captured from the demand side at a triennial frequency:
1. Affordability of formal finance:
a. Households‘ borrowing from various formal sources
b. Interest rates charged by banks, NBFCs, and PACSs to households for the following
formal credit products: consumption smoothing/ emergency loan (secured and
unsecured); Education loan; Housing loan; Crop loan
c. Interest rates charged by banks, NBFCs, and PACSs to small businesses for the
following credit products: Short term loan; Long term loan; Working capital loan
d. Transaction costs and other charges:
209
Measurement and Monitoring: Demand Side Strategy
i. Incurred by households for the following credit products: consumption
smoothing/ emergency loan (secured and unsecured); Education loan;
Housing loan; Crop loan
ii. Incurred by small businesses for the following credit products: Short term
loan; Long term loan; Working capital loan
e. Sufficiency of formal credit:
i. Borrowing from formal sources as a percentage of total borrowing per
household
ii. Borrowing from formal sources as a percentage of total borrowing per small
business unit
2. Cost of investment products:
a. Types of investment products availed
b. Charges including the processing and transaction related charges for the following
products: Mutual Funds; Endowment products offered by insurance companies;
Equity; Bonds; Derivatives
3. Returns from investment products:
a. Nominal return from investment products: Mutual Funds; Endowment products
offered by insurance companies; Equity; Bonds; Derivatives
Strategies for Undertaking Cost & Return Survey: Given that for assessing various costs
associated with formal financial products and returns from investment products one needs to
undertake rigourous primary data collection following a very well executed survey design, this
must be undertaken as a standalone nationally representative consumer survey. Given the
complexities involved in designing the survey and analysing the survey outputs, the
Committee recommends that this survey be delegated to institutions which have appropriate
capacity and expertise in conducting such nationally representative surveys with the required
academic rigour. Institutions such as the National Council of Applied Economic Research
(NCAER) and the Centre for Microfinance, IFMR Research, which have expertise in undertaking
rigourous primary survey, can be considered for the task of undertaking the cost and return
survey.
The sampling plan for such a survey and the coverage required need to be determined based
on the targeted level of representation and nature of the data required. If a district level
representation is preferred over a State level representation, a large sample is required which
calls for significantly more funding296. Also, as the cost and returns are less likely to change
frequently, the Committee recommends that the survey should be undertaken at a triennial
frequency.
210
Recommendations Regarding Measurement and Monitoring
Chapter 7.8
Recommendations Regarding Measurement and Monitoring of
Comprehensive Access to Financial Services
In conclusion, this section makes the following recommendations:
7.1
RBI should mandate all formal providers of financial services to households and small
businesses to report data on a quarterly basis at the level of each one of their access
points such as branches, outlets, BCs, ATMs, and POS terminals, as applicable. This
includes data on geo-spatial location, access, services offered, quantum of
transactions, depth of penetration, and application of Suitability process. This data
should be verified periodically by the RBI using standardised quality control and follow
up visits conducted by trained enumeration field teams within randomly selected sub
samples.
7.2
In order to measure access, usage, and affordability of financial services, RBI should
mandate two surveys of consumers to gain a more accurate picture of progress
towards achieving the desired outcomes outlined by the vision statements. The
Financial Access & Usage Survey should be a nationally representative survey of
consumers undertaken annually to collect data on access and usage of financial
services and can be incorporated as additional modules in nationally representative
surveys that are being undertaken for other purposes by institutions such as the
National Sample Survey Organisation (NSSO) and the Centre for Monitoring Indian
Economy (CMIE). The Cost & Return Survey should be a nationally representative
survey of consumers undertaken triennially to collect data on costs of credit,
insurance and investment products, as well as returns on deposits and investment
products. For this survey, RBI should commission institutions which have appropriate
capacity and expertise in conducting such nationally representative surveys with the
required academic rigour.
211
District-Sector Matrix for APSL
Annexure A
District-Sector Matrix for APSL
CRISIL
Inclusix
Rank
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
District
Pathanamthitta
Karaikal
Thiruvananthapuram
Ernakulam
Kottayam
Thrissur
Kodagu
Coimbatore
Chennai
Bengaluru Urban
Mumbai
Hyderabad
Mahe
Puducherry
Alapuzha
Mumbai Suburban
Kasaragod
Chandigarh
Udipi
Wayanad
Khurdha
Kannur
Sivaganga
North Goa
Krishna
Dharwad
Chikmagalur
Kozhikode
Nilgiris
Dakshin Kannad
Solan
Tiruchirapalli
South Goa
Kanyakumari
Shimla
Kinnaur
Madurai
Erode
Hamirpur
Lahul & Spiti
Shimoga
Palakkad
Kolkata
Patiala
Hassan
State/UT
Kerala
Puducherry
Kerala
Kerala
Kerala
Kerala
Karnataka
Tamil Nadu
Tamil Nadu
Karnataka
Maharashtra
Andhra Pradesh
Puducherry
Puducherry
Kerala
Maharashtra
Kerala
Chandigarh
Karnataka
Kerala
Odisha
Kerala
Tamil Nadu
Goa
Andhra Pradesh
Karnataka
Karnataka
Kerala
Tamil Nadu
Karnataka
Himachal Pradesh
Tamil Nadu
Goa
Tamil Nadu
Himachal Pradesh
Himachal Pradesh
Tamil Nadu
Tamil Nadu
Himachal Pradesh
Himachal Pradesh
Karnataka
Kerala
West Bengal
Punjab
Karnataka
PSL Sector
Multiple
Adjusted
Regional
Multiple
1.0000
1.0124
1.0138
1.0213
1.0257
1.0292
1.0316
1.0346
1.0383
1.0394
1.0402
1.0435
1.0448
1.0467
1.0473
1.0473
1.0483
1.0489
1.0535
1.0559
1.0570
1.0572
1.0578
1.0599
1.0610
1.0624
1.0629
1.0653
1.0662
1.0678
1.0691
1.0694
1.0718
1.0721
1.0724
1.0726
1.0743
1.0753
1.0759
1.0759
1.0767
1.0770
1.0783
1.0786
1.0797
Direct
Agriculture
Weaker
Sections
Others
1.25
1.10
1.00
ADJUSTED SECTOR DISTRICT MATRIX
1.2545
1.1013
1.0000
1.2701
1.1149
1.0124
1.2718
1.1164
1.0138
1.2813
1.1247
1.0213
1.2867
1.1295
1.0257
1.2911
1.1334
1.0292
1.2941
1.1360
1.0316
1.2979
1.1393
1.0346
1.3026
1.1435
1.0383
1.3040
1.1447
1.0394
1.3050
1.1456
1.0402
1.3091
1.1491
1.0435
1.3107
1.1506
1.0448
1.3131
1.1527
1.0467
1.3138
1.1533
1.0473
1.3138
1.1533
1.0473
1.3152
1.1545
1.0483
1.3158
1.1551
1.0489
1.3216
1.1601
1.0535
1.3246
1.1628
1.0559
1.3260
1.1640
1.0570
1.3263
1.1643
1.0572
1.3270
1.1649
1.0578
1.3297
1.1673
1.0599
1.3311
1.1685
1.0610
1.0624
1.3328
1.1699
1.3334
1.1705
1.0629
1.3365
1.1732
1.0653
1.3375
1.1741
1.0662
1.3395
1.1759
1.0678
1.3412
1.1774
1.0691
1.3416
1.1777
1.0694
1.3446
1.1803
1.0718
1.3450
1.1806
1.0721
1.3453
1.1809
1.0724
1.3456
1.1812
1.0726
1.3477
1.1830
1.0743
1.3490
1.1842
1.0753
1.3497
1.1848
1.0759
1.3497
1.1848
1.0759
1.3507
1.1857
1.0767
1.3511
1.1860
1.0770
1.3527
1.1875
1.0783
1.3531
1.1878
1.0786
1.3544
1.1890
1.0797
213
District-Sector Matrix for APSL
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
Nellore
Toothukudi
Karur
Guntur
Kamrup Metropolitan
Cuddapah
West Godavari
Idukki
Gurgaon
Tirunelvali
Dehra Dun
Delhi
Perambalur
Kollam
Chittoor
Prakasam
East Godavari
Nizamabad
Rohtak
Panchkula
Mysore
Jalandhar
Gautam Buddha Nagar
Vishakhapatnam
Ludhiana
Ambala
Uttara Kannada
Thanjavur
Kulu
Theni
Bhopal
Rangareddy
Kapurthala
Shahid Bhagat Singh
Nagar
Kancheepuram
Virudhunagar
Anantapur
Rupnagar
Warangal
Hoshiarpur
Dindigul
Lakshadweep
Bilaspur
Fatehgarh Sahib
Garhwal
Una
Sahibzada Ajit Singh
Nagar
Papum Pare
Thiruvarur
Khammam
Ramanathapuram
Andhra Pradesh
Tamil Nadu
Tamil Nadu
Andhra Pradesh
Assam
Andhra Pradesh
Andhra Pradesh
Kerala
Haryana
Tamil Nadu
Uttarakhand
Delhi
Tamil Nadu
Kerala
Andhra Pradesh
Andhra Pradesh
Andhra Pradesh
Andhra Pradesh
Haryana
Haryana
Karnataka
Punjab
Uttar Pradesh
Andhra Pradesh
Punjab
Haryana
Karnataka
Tamil Nadu
Himachal Pradesh
Tamil Nadu
Madhya Pradesh
Andhra Pradesh
Punjab
1.0799
1.0802
1.0807
1.0807
1.0815
1.0815
1.0840
1.0845
1.0851
1.0859
1.0861
1.0864
1.0878
1.0880
1.0883
1.0886
1.0891
1.0899
1.0902
1.0905
1.0905
1.0907
1.0913
1.0913
1.0918
1.0934
1.0945
1.0948
1.0953
1.0959
1.0967
1.0972
1.0972
1.3548
1.3551
1.3558
1.3558
1.3568
1.3568
1.3599
1.3605
1.3612
1.3622
1.3626
1.3629
1.3646
1.3649
1.3653
1.3656
1.3663
1.3673
1.3677
1.3680
1.3680
1.3683
1.3690
1.3690
1.3697
1.3717
1.3731
1.3734
1.3741
1.3748
1.3758
1.3765
1.3765
1.1893
1.1896
1.1902
1.1902
1.1911
1.1911
1.1937
1.1943
1.1949
1.1958
1.1961
1.1964
1.1979
1.1982
1.1985
1.1988
1.1994
1.2003
1.2006
1.2009
1.2009
1.2012
1.2018
1.2018
1.2024
1.2041
1.2053
1.2056
1.2062
1.2068
1.2077
1.2083
1.2083
1.0799
1.0802
1.0807
1.0807
1.0815
1.0815
1.0840
1.0845
1.0851
1.0859
1.0861
1.0864
1.0878
1.0880
1.0883
1.0886
1.0891
1.0899
1.0902
1.0905
1.0905
1.0907
1.0913
1.0913
1.0918
1.0934
1.0945
1.0948
1.0953
1.0959
1.0967
1.0972
1.0972
Punjab
Tamil Nadu
Tamil Nadu
Andhra Pradesh
Punjab
Andhra Pradesh
Punjab
Tamil Nadu
Lakshadweep
Himachal Pradesh
Punjab
Uttarakhand
Himachal Pradesh
1.0986
1.0988
1.0994
1.0996
1.0996
1.0996
1.1010
1.1010
1.1013
1.1013
1.1015
1.1021
1.1026
1.3782
1.3785
1.3792
1.3795
1.3795
1.3795
1.3812
1.3812
1.3815
1.3815
1.3819
1.3826
1.3832
1.2098
1.2101
1.2107
1.2110
1.2110
1.2110
1.2125
1.2125
1.2128
1.2128
1.2131
1.2137
1.2142
1.0986
1.0988
1.0994
1.0996
1.0996
1.0996
1.1010
1.1010
1.1013
1.1013
1.1015
1.1021
1.1026
Punjab
Arunachal Pradesh
Tamil Nadu
Andhra Pradesh
Tamil Nadu
1.1026
1.1034
1.1048
1.1048
1.1058
1.3832
1.3842
1.3859
1.3859
1.3873
1.2142
1.2151
1.2166
1.2166
1.2178
1.1026
1.1034
1.1048
1.1048
1.1058
214
District-Sector Matrix for APSL
97
98
99
100
101
102
103
104
Nagapattinam
Medak
Pithoragarh
Namakkal
Pudukkottai
Kangra
Bathinda
Amritsar
105
106
107
108
109
110
111
112
113
114
115
116
117
118
119
120
121
122
123
124
125
126
127
128
129
130
131
132
133
134
135
136
137
138
139
140
141
142
143
144
145
146
147
148
South Andaman
Gadag
Cuddalore
Kurukshetra
Vizianagaram
Lucknow
Jammu
Rewari
Malappuram
Barnala
Porbandar
Nalgonda
East Sikkim
Karimnagar
Tiruppur
Kanpur Dehat
Almora
Kurnool
Srikakulam
Yamunanagar
Adilabad
Krishnagiri
Moga
Chitradurga
Bengaluru Rural
Gurdaspur
Mandi
Sangrur
Jamnagar
Gulbarga
Vadodara
Ramanagara
Indore
Srinagar
Salem
Cuttack
Faridkot
Davangere
Hisar
Vellore
Ariyalur
Mahbubnagar
Mandya
Meerut
Tamil Nadu
Andhra Pradesh
Uttarakhand
Tamil Nadu
Tamil Nadu
Himachal Pradesh
Punjab
Punjab
Andaman & Nicobar
Islands
Karnataka
Tamil Nadu
Haryana
Andhra Pradesh
Uttar Pradesh
Jammu & Kashmir
Haryana
Kerala
Punjab
Gujarat
Andhra Pradesh
Sikkim
Andhra Pradesh
Tamil Nadu
Uttar Pradesh
Uttarakhand
Andhra Pradesh
Andhra Pradesh
Haryana
Andhra Pradesh
Tamil Nadu
Punjab
Karnataka
Karnataka
Punjab
Himachal Pradesh
Punjab
Gujarat
Karnataka
Gujarat
Karnataka
Madhya Pradesh
Jammu & Kashmir
Tamil Nadu
Odisha
Punjab
Karnataka
Haryana
Tamil Nadu
Tamil Nadu
Andhra Pradesh
Karnataka
Uttar Pradesh
1.1061
1.1064
1.1067
1.1069
1.1085
1.1085
1.1088
1.1088
1.3876
1.3880
1.3883
1.3887
1.3907
1.3907
1.3910
1.3910
1.2181
1.2184
1.2187
1.2190
1.2208
1.2208
1.2211
1.2211
1.1061
1.1064
1.1067
1.1069
1.1085
1.1085
1.1088
1.1088
1.1091
1.1094
1.1096
1.1102
1.1102
1.1107
1.1110
1.1110
1.1112
1.1121
1.1134
1.1139
1.1139
1.1142
1.1145
1.1148
1.1150
1.1150
1.1158
1.1164
1.1180
1.1183
1.1183
1.1183
1.1191
1.1199
1.1199
1.1204
1.1207
1.1218
1.1218
1.1218
1.1220
1.1223
1.1229
1.1237
1.1239
1.1253
1.1256
1.1258
1.1261
1.1261
1.1264
1.1264
1.3914
1.3917
1.3920
1.3927
1.3927
1.3934
1.3937
1.3937
1.3941
1.3951
1.3968
1.3975
1.3975
1.3978
1.3981
1.3985
1.3988
1.3988
1.3998
1.4005
1.4025
1.4029
1.4029
1.4029
1.4039
1.4049
1.4049
1.4056
1.4059
1.4073
1.4073
1.4073
1.4076
1.4080
1.4086
1.4097
1.4100
1.4117
1.4120
1.4124
1.4127
1.4127
1.4130
1.4130
1.2214
1.2217
1.2220
1.2226
1.2226
1.2232
1.2235
1.2235
1.2238
1.2247
1.2261
1.2267
1.2267
1.2270
1.2273
1.2276
1.2279
1.2279
1.2288
1.2294
1.2312
1.2315
1.2315
1.2315
1.2324
1.2333
1.2333
1.2339
1.2342
1.2354
1.2354
1.2354
1.2357
1.2360
1.2365
1.2374
1.2377
1.2392
1.2395
1.2398
1.2401
1.2401
1.2404
1.2404
1.1091
1.1094
1.1096
1.1102
1.1102
1.1107
1.1110
1.1110
1.1112
1.1121
1.1134
1.1139
1.1139
1.1142
1.1145
1.1148
1.1150
1.1150
1.1158
1.1164
1.1180
1.1183
1.1183
1.1183
1.1191
1.1199
1.1199
1.1204
1.1207
1.1218
1.1218
1.1218
1.1220
1.1223
1.1229
1.1237
1.1239
1.1253
1.1256
1.1258
1.1261
1.1261
1.1264
1.1264
215
District-Sector Matrix for APSL
149
150
151
152
153
154
155
156
157
158
159
160
161
162
163
164
165
166
167
168
169
170
171
172
173
174
175
176
177
178
179
180
181
182
183
184
185
186
187
188
189
190
191
192
193
194
195
196
197
198
199
200
201
Karnal
Kaithal
Navsari
Sirmaur
East Khasi Hills
Sindhudurg
Yanam
Thiruvallur
Nainital
Raichur
Bellary
Sirsa
Rudraprayag
Haveri
Ganganagar
Tumkur
Udham Singh Nagar
Ahmedabad
Belgaum
Jhajjar
Pune
Sambalpur
Wardha
Jhansi
Angul
Chamoli
Dharmapuri
Panipat
Kachchh
Bagalkote
Jaipur
Leh Ladakh
Mahendragarh
Tiruvannamalai
Ferozpur
Villupuram
Koppal
Chamba
Mathura
Bageshwar
Sonipat
Fatehabad
East Singhbhum
Mansa
Chikkaballapura
Faridabad
Nagpur
Muktsar
Jagatsinghpur
Tehri Garhwal
Bhiwani
Rajkot
Amreli
Haryana
Haryana
Gujarat
Himachal Pradesh
Meghalaya
Maharashtra
Puducherry
Tamil Nadu
Uttarakhand
Karnataka
Karnataka
Haryana
Uttarakhand
Karnataka
Rajasthan
Karnataka
Uttarakhand
Gujarat
Karnataka
Haryana
Maharashtra
Odisha
Maharashtra
Uttar Pradesh
Odisha
Uttarakhand
Tamil Nadu
Haryana
Gujarat
Karnataka
Rajasthan
Jammu & Kashmir
Haryana
Tamil Nadu
Punjab
Tamil Nadu
Karnataka
Himachal Pradesh
Uttar Pradesh
Uttarakhand
Haryana
Haryana
Jharkhand
Punjab
Karnataka
Haryana
Maharashtra
Punjab
Odisha
Uttarakhand
Haryana
Gujarat
Gujarat
1.1264
1.1266
1.1272
1.1274
1.1277
1.1280
1.1291
1.1291
1.1293
1.1299
1.1299
1.1301
1.1304
1.1307
1.1312
1.1323
1.1326
1.1326
1.1331
1.1337
1.1339
1.1339
1.1339
1.1339
1.1342
1.1342
1.1345
1.1358
1.1361
1.1364
1.1364
1.1366
1.1369
1.1374
1.1374
1.1380
1.1382
1.1385
1.1385
1.1388
1.1388
1.1391
1.1396
1.1396
1.1399
1.1401
1.1404
1.1404
1.1404
1.1409
1.1409
1.1409
1.1409
1.4130
1.4134
1.4141
1.4144
1.4147
1.4151
1.4164
1.4164
1.4168
1.4174
1.4174
1.4178
1.4181
1.4185
1.4191
1.4205
1.4208
1.4208
1.4215
1.4222
1.4225
1.4225
1.4225
1.4225
1.4229
1.4229
1.4232
1.4249
1.4252
1.4256
1.4256
1.4259
1.4263
1.4269
1.4269
1.4276
1.4279
1.4283
1.4283
1.4286
1.4286
1.4290
1.4296
1.4296
1.4300
1.4303
1.4307
1.4307
1.4307
1.4313
1.4313
1.4313
1.4313
1.2404
1.2407
1.2413
1.2416
1.2419
1.2422
1.2434
1.2434
1.2437
1.2443
1.2443
1.2446
1.2449
1.2452
1.2458
1.2470
1.2472
1.2472
1.2478
1.2484
1.2487
1.2487
1.2487
1.2487
1.2490
1.2490
1.2493
1.2508
1.2511
1.2514
1.2514
1.2517
1.2520
1.2526
1.2526
1.2532
1.2535
1.2538
1.2538
1.2541
1.2541
1.2544
1.2550
1.2550
1.2553
1.2556
1.2559
1.2559
1.2559
1.2565
1.2565
1.2565
1.2565
1.1264
1.1266
1.1272
1.1274
1.1277
1.1280
1.1291
1.1291
1.1293
1.1299
1.1299
1.1301
1.1304
1.1307
1.1312
1.1323
1.1326
1.1326
1.1331
1.1337
1.1339
1.1339
1.1339
1.1339
1.1342
1.1342
1.1345
1.1358
1.1361
1.1364
1.1364
1.1366
1.1369
1.1374
1.1374
1.1380
1.1382
1.1385
1.1385
1.1388
1.1388
1.1391
1.1396
1.1396
1.1399
1.1401
1.1404
1.1404
1.1404
1.1409
1.1409
1.1409
1.1409
216
District-Sector Matrix for APSL
202
203
204
205
206
207
208
209
210
211
212
213
214
215
216
217
218
219
220
221
222
223
224
225
226
227
228
229
230
231
232
233
234
235
236
237
238
239
240
241
242
243
244
245
246
247
248
249
250
251
252
253
254
Anand
Ranchi
Aizawl
Hamirpur
Haridwar
Kolar
West Tripura
Jharsuguda
Jabalpur
Mamit
Tarn Taran
Samba
Bijapur
Darjiling
Puri
Daman
Bharuch
Jalaun
Champawat
Ratnagiri
Dibrugarh
Agra
Hoshangabad
Mayurbhanj
Uttar Kashi
Kota
Kendujhargarh
Jorhat
Dhenkanal
Junagadh
East Siang
Imphal West
Baleshwar
Jind
Mahesana
North Sikkim
West Siang
Gandhinagar
Bidar
Serchhip
Ganjam
Jyotiba Phule Nagar
Dimapur
Banda
Kohima
Chamrajnagar
Bara Banki
Kanpur Nagar
Patna
Ajmer
Varanasi
Ujjain
Valsad
Gujarat
Jharkhand
Mizoram
Uttar Pradesh
Uttarakhand
Karnataka
Tripura
Odisha
Madhya Pradesh
Mizoram
Punjab
Jammu & Kashmir
Karnataka
West Bengal
Odisha
Daman & Diu Diu
Gujarat
Uttar Pradesh
Uttarakhand
Maharashtra
Assam
Uttar Pradesh
Madhya Pradesh
Odisha
Uttarakhand
Rajasthan
Odisha
Assam
Odisha
Gujarat
Arunachal Pradesh
Manipur
Odisha
Haryana
Gujarat
Sikkim
Arunachal Pradesh
Gujarat
Karnataka
Mizoram
Odisha
Uttar Pradesh
Nagaland
Uttar Pradesh
Nagaland
Karnataka
Uttar Pradesh
Uttar Pradesh
Bihar
Rajasthan
Uttar Pradesh
Madhya Pradesh
Gujarat
1.1412
1.1412
1.1412
1.1418
1.1418
1.1420
1.1428
1.1439
1.1439
1.1439
1.1442
1.1442
1.1445
1.1445
1.1445
1.1445
1.1458
1.1458
1.1461
1.1461
1.1463
1.1466
1.1472
1.1472
1.1477
1.1490
1.1496
1.1496
1.1496
1.1496
1.1499
1.1501
1.1501
1.1504
1.1504
1.1504
1.1507
1.1509
1.1512
1.1515
1.1515
1.1520
1.1520
1.1520
1.1528
1.1531
1.1531
1.1534
1.1539
1.1539
1.1550
1.1550
1.1553
1.4317
1.4317
1.4317
1.4323
1.4323
1.4327
1.4337
1.4351
1.4351
1.4351
1.4354
1.4354
1.4357
1.4357
1.4357
1.4357
1.4374
1.4374
1.4378
1.4378
1.4381
1.4384
1.4391
1.4391
1.4398
1.4415
1.4422
1.4422
1.4422
1.4422
1.4425
1.4428
1.4428
1.4432
1.4432
1.4432
1.4435
1.4439
1.4442
1.4445
1.4445
1.4452
1.4452
1.4452
1.4462
1.4466
1.4466
1.4469
1.4476
1.4476
1.4489
1.4489
1.4493
1.2568
1.2568
1.2568
1.2574
1.2574
1.2577
1.2585
1.2597
1.2597
1.2597
1.2600
1.2600
1.2603
1.2603
1.2603
1.2603
1.2618
1.2618
1.2621
1.2621
1.2624
1.2627
1.2633
1.2633
1.2639
1.2654
1.2660
1.2660
1.2660
1.2660
1.2663
1.2666
1.2666
1.2669
1.2669
1.2669
1.2672
1.2675
1.2678
1.2681
1.2681
1.2687
1.2687
1.2687
1.2696
1.2698
1.2698
1.2701
1.2707
1.2707
1.2719
1.2719
1.2722
1.1412
1.1412
1.1412
1.1418
1.1418
1.1420
1.1428
1.1439
1.1439
1.1439
1.1442
1.1442
1.1445
1.1445
1.1445
1.1445
1.1458
1.1458
1.1461
1.1461
1.1463
1.1466
1.1472
1.1472
1.1477
1.1490
1.1496
1.1496
1.1496
1.1496
1.1499
1.1501
1.1501
1.1504
1.1504
1.1504
1.1507
1.1509
1.1512
1.1515
1.1515
1.1520
1.1520
1.1520
1.1528
1.1531
1.1531
1.1534
1.1539
1.1539
1.1550
1.1550
1.1553
217
District-Sector Matrix for APSL
255
256
257
258
259
260
261
262
263
264
265
266
267
268
269
270
271
272
273
274
275
276
277
278
279
280
281
282
283
284
285
286
287
288
289
290
291
292
293
294
295
296
297
298
299
300
301
302
303
304
305
306
307
Nayagarh
Hanumangarh
Saharanpur
Kathua
West Kameng
Kolasib
South Tripura
Parbhani
Gwalior
Hathras
Dadra & Nagar Haveli
Moradabad
Koriya
Bundi
Lalitpur
Palwal
Sagar
Sundargarh
Mahoba
Surendranagar
Koraput
Aligarh
Dibang Valley
Rayagada
Yadgir
Bargarh
Jajpur
Baramula
Ghaziabad
North Cachar Hills
Kalahandi
Sehore
Daman
Bikaner
Rampur
Akola
Harda
Amravati
Chitrakoot
Churu
Kendrapara
Chandrapur
Kamrup
Dewas
Baran
Muzaffarnagar
Raigarh
Nalbari
Unnao
Jhunjhunu
Jalna
Shravasti
Aurangabad
Odisha
Rajasthan
Uttar Pradesh
Jammu & Kashmir
Arunachal Pradesh
Mizoram
Tripura
Maharashtra
Madhya Pradesh
Uttar Pradesh
Dadra & Nagar Haveli
Uttar Pradesh
Chhattisgarh
Rajasthan
Uttar Pradesh
Haryana
Madhya Pradesh
Odisha
Uttar Pradesh
Gujarat
Odisha
Uttar Pradesh
Arunachal Pradesh
Odisha
Karnataka
Odisha
Odisha
Jammu & Kashmir
Uttar Pradesh
Assam
Odisha
Madhya Pradesh
Daman & Diu Daman
Rajasthan
Uttar Pradesh
Maharashtra
Madhya Pradesh
Maharashtra
Uttar Pradesh
Rajasthan
Odisha
Maharashtra
Assam
Madhya Pradesh
Rajasthan
Uttar Pradesh
Maharashtra
Assam
Uttar Pradesh
Rajasthan
Maharashtra
Uttar Pradesh
Maharashtra
1.1555
1.1555
1.1571
1.1574
1.1577
1.1577
1.1582
1.1585
1.1585
1.1593
1.1596
1.1598
1.1598
1.1601
1.1601
1.1601
1.1604
1.1604
1.1607
1.1609
1.1615
1.1617
1.1617
1.1617
1.1620
1.1620
1.1620
1.1623
1.1623
1.1625
1.1625
1.1631
1.1631
1.1631
1.1636
1.1636
1.1639
1.1642
1.1647
1.1647
1.1650
1.1650
1.1652
1.1655
1.1658
1.1658
1.1661
1.1663
1.1666
1.1669
1.1669
1.1669
1.1671
1.4496
1.4496
1.4517
1.4520
1.4523
1.4523
1.4530
1.4533
1.4533
1.4544
1.4547
1.4550
1.4550
1.4554
1.4554
1.4554
1.4557
1.4557
1.4561
1.4564
1.4571
1.4574
1.4574
1.4574
1.4578
1.4578
1.4578
1.4581
1.4581
1.4584
1.4584
1.4591
1.4591
1.4591
1.4598
1.4598
1.4601
1.4605
1.4611
1.4611
1.4615
1.4615
1.4618
1.4622
1.4625
1.4625
1.4628
1.4632
1.4635
1.4638
1.4638
1.4638
1.4642
1.2725
1.2725
1.2743
1.2746
1.2749
1.2749
1.2755
1.2758
1.2758
1.2767
1.2770
1.2773
1.2773
1.2776
1.2776
1.2776
1.2779
1.2779
1.2782
1.2785
1.2791
1.2794
1.2794
1.2794
1.2797
1.2797
1.2797
1.2800
1.2800
1.2803
1.2803
1.2808
1.2808
1.2808
1.2814
1.2814
1.2817
1.2820
1.2826
1.2826
1.2829
1.2829
1.2832
1.2835
1.2838
1.2838
1.2841
1.2844
1.2847
1.2850
1.2850
1.2850
1.2853
1.1555
1.1555
1.1571
1.1574
1.1577
1.1577
1.1582
1.1585
1.1585
1.1593
1.1596
1.1598
1.1598
1.1601
1.1601
1.1601
1.1604
1.1604
1.1607
1.1609
1.1615
1.1617
1.1617
1.1617
1.1620
1.1620
1.1620
1.1623
1.1623
1.1625
1.1625
1.1631
1.1631
1.1631
1.1636
1.1636
1.1639
1.1642
1.1647
1.1647
1.1650
1.1650
1.1652
1.1655
1.1658
1.1658
1.1661
1.1663
1.1666
1.1669
1.1669
1.1669
1.1671
218
District-Sector Matrix for APSL
308
309
310
311
312
313
314
315
316
317
318
319
Azamgarh
Rai Bareli
Chittaurgarh
Satna
Baghpat
Jaisalmer
Alwar
Sibsagar
Kargil
Balangir
Kandhamal
Bhadrak
320
321
322
323
324
325
326
327
328
329
330
331
332
333
334
335
336
337
338
339
340
341
342
343
344
345
346
347
348
349
350
351
352
353
354
355
356
357
358
359
Nicobar
North Tripura
Bareilly
Sawai Madhopur
Narsimhapur
Sabar Kantha
Golaghat
Bijnor
Navapara
Dangs
Udhampur
Jodhpur
Kolhapur
Bhandara
Pali
Kheda
Farrukhabad
Nanded
Barddhaman
Kanauj
Sultanpur
Sonepur
Dhanbad
Surat
Ghazipur
Sikar
Gorakhpur
Deogarh
Ballia
Jaunpur
Bhavnagar
Hugli
Bulandshahr
Ramgarh
Shahjahanpur
Lohardaga
Dumka
Damoh
Sitapur
South Sikkim
Uttar Pradesh
Uttar Pradesh
Rajasthan
Madhya Pradesh
Uttar Pradesh
Rajasthan
Rajasthan
Assam
Jammu & Kashmir
Odisha
Odisha
Odisha
Andaman & Nicobar
Islands
Tripura
Uttar Pradesh
Rajasthan
Madhya Pradesh
Gujarat
Assam
Uttar Pradesh
Odisha
Gujarat
Jammu & Kashmir
Rajasthan
Maharashtra
Maharashtra
Rajasthan
Gujarat
Uttar Pradesh
Maharashtra
West Bengal
Uttar Pradesh
Uttar Pradesh
Odisha
Jharkhand
Gujarat
Uttar Pradesh
Rajasthan
Uttar Pradesh
Odisha
Uttar Pradesh
Uttar Pradesh
Gujarat
West Bengal
Uttar Pradesh
Jharkhand
Uttar Pradesh
Jharkhand
Jharkhand
Madhya Pradesh
Uttar Pradesh
Sikkim
1.1674
1.1674
1.1674
1.1679
1.1682
1.1682
1.1682
1.1688
1.1690
1.1690
1.1693
1.1693
1.4645
1.4645
1.4645
1.4652
1.4655
1.4655
1.4655
1.4662
1.4666
1.4666
1.4669
1.4669
1.2856
1.2856
1.2856
1.2862
1.2865
1.2865
1.2865
1.2871
1.2874
1.2874
1.2877
1.2877
1.1674
1.1674
1.1674
1.1679
1.1682
1.1682
1.1682
1.1688
1.1690
1.1690
1.1693
1.1693
1.1693
1.1693
1.1696
1.1696
1.1696
1.1701
1.1701
1.1701
1.1704
1.1704
1.1704
1.1704
1.1704
1.1704
1.1704
1.1706
1.1709
1.1712
1.1712
1.1715
1.1717
1.1717
1.1720
1.1720
1.1723
1.1723
1.1725
1.1731
1.1731
1.1733
1.1733
1.1736
1.1736
1.1736
1.1736
1.1742
1.1744
1.1744
1.1744
1.1744
1.4669
1.4669
1.4672
1.4672
1.4672
1.4679
1.4679
1.4679
1.4683
1.4683
1.4683
1.4683
1.4683
1.4683
1.4683
1.4686
1.4689
1.4693
1.4693
1.4696
1.4699
1.4699
1.4703
1.4703
1.4706
1.4706
1.4710
1.4716
1.4716
1.4720
1.4720
1.4723
1.4723
1.4723
1.4723
1.4730
1.4733
1.4733
1.4733
1.4733
1.2877
1.2877
1.2880
1.2880
1.2880
1.2886
1.2886
1.2886
1.2889
1.2889
1.2889
1.2889
1.2889
1.2889
1.2889
1.2892
1.2895
1.2898
1.2898
1.2901
1.2904
1.2904
1.2907
1.2907
1.2910
1.2910
1.2913
1.2919
1.2919
1.2921
1.2921
1.2924
1.2924
1.2924
1.2924
1.2930
1.2933
1.2933
1.2933
1.2933
1.1693
1.1693
1.1696
1.1696
1.1696
1.1701
1.1701
1.1701
1.1704
1.1704
1.1704
1.1704
1.1704
1.1704
1.1704
1.1706
1.1709
1.1712
1.1712
1.1715
1.1717
1.1717
1.1720
1.1720
1.1723
1.1723
1.1725
1.1731
1.1731
1.1733
1.1733
1.1736
1.1736
1.1736
1.1736
1.1742
1.1744
1.1744
1.1744
1.1744
219
District-Sector Matrix for APSL
360
361
362
363
364
365
366
367
368
369
370
371
372
373
374
375
376
377
378
379
380
381
382
383
384
385
386
387
388
389
390
391
392
393
394
395
396
397
398
399
400
401
402
403
404
405
406
407
408
409
410
411
Buldana
Etawah
Paschim Medinipur
Yavatmal
Patan
Bokaro
Bhilwara
Sangli
Rajnandgaon
Mainpuri
Allahabad
Raigarh
West Singhbhum
Gajapati
Saiha
Pilibhit
Mau
Deoghar
Tawang
Raisen
Thane
Koch Bihar
Etah
Tonk
Durg
Faizabad
Chhindwara
Surguja
Lakhimpur
Rajouri
Munger
Udaipur
Khunti
North 24 Parganas
Sonitpur
Dhalai
Tinsukia
Boudh
Narmada
Buxar
Birbhum
Neemuch
Pratapgarh
Reasi
Rajsamand
Anuppur
Hardoi
Solapur
Sirohi
Kanker
Betul
Raipur
Maharashtra
Uttar Pradesh
West Bengal
Maharashtra
Gujarat
Jharkhand
Rajasthan
Maharashtra
Chhattisgarh
Uttar Pradesh
Uttar Pradesh
Chhattisgarh
Jharkhand
Odisha
Mizoram
Uttar Pradesh
Uttar Pradesh
Jharkhand
Arunachal Pradesh
Madhya Pradesh
Maharashtra
West Bengal
Uttar Pradesh
Rajasthan
Chhattisgarh
Uttar Pradesh
Madhya Pradesh
Chhattisgarh
Assam
Jammu & Kashmir
Bihar
Rajasthan
Jharkhand
West Bengal
Assam
Tripura
Assam
Odisha
Gujarat
Bihar
West Bengal
Madhya Pradesh
Uttar Pradesh
Jammu & Kashmir
Rajasthan
Madhya Pradesh
Uttar Pradesh
Maharashtra
Rajasthan
Chhattisgarh
Madhya Pradesh
Chhattisgarh
1.1747
1.1747
1.1752
1.1755
1.1758
1.1758
1.1758
1.1760
1.1760
1.1760
1.1760
1.1763
1.1766
1.1769
1.1769
1.1769
1.1769
1.1771
1.1771
1.1774
1.1777
1.1779
1.1779
1.1782
1.1782
1.1785
1.1785
1.1787
1.1790
1.1790
1.1790
1.1790
1.1790
1.1790
1.1793
1.1793
1.1793
1.1793
1.1796
1.1798
1.1804
1.1804
1.1804
1.1806
1.1809
1.1809
1.1809
1.1812
1.1812
1.1814
1.1814
1.1817
1.4737
1.4737
1.4743
1.4747
1.4750
1.4750
1.4750
1.4754
1.4754
1.4754
1.4754
1.4757
1.4760
1.4764
1.4764
1.4764
1.4764
1.4767
1.4767
1.4771
1.4774
1.4777
1.4777
1.4781
1.4781
1.4784
1.4784
1.4788
1.4791
1.4791
1.4791
1.4791
1.4791
1.4791
1.4794
1.4794
1.4794
1.4794
1.4798
1.4801
1.4808
1.4808
1.4808
1.4811
1.4815
1.4815
1.4815
1.4818
1.4818
1.4821
1.4821
1.4825
1.2936
1.2936
1.2942
1.2945
1.2948
1.2948
1.2948
1.2951
1.2951
1.2951
1.2951
1.2954
1.2957
1.2960
1.2960
1.2960
1.2960
1.2963
1.2963
1.2966
1.2969
1.2972
1.2972
1.2975
1.2975
1.2978
1.2978
1.2981
1.2984
1.2984
1.2984
1.2984
1.2984
1.2984
1.2987
1.2987
1.2987
1.2987
1.2990
1.2993
1.2999
1.2999
1.2999
1.3002
1.3005
1.3005
1.3005
1.3008
1.3008
1.3011
1.3011
1.3014
1.1747
1.1747
1.1752
1.1755
1.1758
1.1758
1.1758
1.1760
1.1760
1.1760
1.1760
1.1763
1.1766
1.1769
1.1769
1.1769
1.1769
1.1771
1.1771
1.1774
1.1777
1.1779
1.1779
1.1782
1.1782
1.1785
1.1785
1.1787
1.1790
1.1790
1.1790
1.1790
1.1790
1.1790
1.1793
1.1793
1.1793
1.1793
1.1796
1.1798
1.1804
1.1804
1.1804
1.1806
1.1809
1.1809
1.1809
1.1812
1.1812
1.1814
1.1814
1.1817
220
District-Sector Matrix for APSL
412
413
414
415
416
417
418
419
420
421
422
423
424
425
426
427
428
429
430
431
432
433
434
435
436
437
438
439
440
441
442
443
444
445
446
447
448
449
450
451
452
453
454
455
456
457
458
459
460
461
462
463
464
Jamtara
Dhar
Bharatpur
Ratlam
Lunglei
Datia
Mokokchung
Basti
Gonda
Nalanda
Ambedkar Nagar
Deoria
Ganderbal
Hazaribag
Gumla
Seraikela-Kharsawan
Jhalawar
Fatehpur
Udalguri
Satara
Shajapur
Auraiya
Dausa
Bhojpur
Washim
Gondiya
Firozabad
Muzaffarpur
Rajgarh
Chandauli
Howrah
Rewa
Karbi Anglong
Palamu
Katni
Bhagalpur
Kaimur
Bankura
East
Dungarpur
Bid
Nashik
Cachar
Shahdol
Banswara
Kodaram
Ri Bhoi
Aurangabad
Sonbhadra
Gopalganj
Siwan
Anantnag
Pulwama
Jharkhand
Madhya Pradesh
Rajasthan
Madhya Pradesh
Mizoram
Madhya Pradesh
Nagaland
Uttar Pradesh
Uttar Pradesh
Bihar
Uttar Pradesh
Uttar Pradesh
Jammu & Kashmir
Jharkhand
Jharkhand
Jharkhand
Rajasthan
Uttar Pradesh
Assam
Maharashtra
Madhya Pradesh
Uttar Pradesh
Rajasthan
Bihar
Maharashtra
Maharashtra
Uttar Pradesh
Bihar
Madhya Pradesh
Uttar Pradesh
West Bengal
Madhya Pradesh
Assam
Jharkhand
Madhya Pradesh
Bihar
Bihar
West Bengal
Madhya Pradesh
Rajasthan
Maharashtra
Maharashtra
Assam
Madhya Pradesh
Rajasthan
Jharkhand
Meghalaya
Bihar
Uttar Pradesh
Bihar
Bihar
Jammu & Kashmir
Jammu & Kashmir
1.1817
1.1817
1.1817
1.1820
1.1820
1.1823
1.1828
1.1828
1.1828
1.1828
1.1828
1.1831
1.1831
1.1831
1.1831
1.1836
1.1836
1.1839
1.1839
1.1839
1.1841
1.1850
1.1850
1.1852
1.1852
1.1852
1.1852
1.1852
1.1858
1.1858
1.1858
1.1860
1.1860
1.1863
1.1863
1.1866
1.1866
1.1866
1.1871
1.1871
1.1874
1.1877
1.1879
1.1885
1.1887
1.1890
1.1890
1.1893
1.1893
1.1893
1.1895
1.1895
1.1898
1.4825
1.4825
1.4825
1.4828
1.4828
1.4832
1.4838
1.4838
1.4838
1.4838
1.4838
1.4842
1.4842
1.4842
1.4842
1.4848
1.4848
1.4852
1.4852
1.4852
1.4855
1.4865
1.4865
1.4869
1.4869
1.4869
1.4869
1.4869
1.4876
1.4876
1.4876
1.4879
1.4879
1.4882
1.4882
1.4886
1.4886
1.4886
1.4893
1.4893
1.4896
1.4899
1.4903
1.4909
1.4913
1.4916
1.4916
1.4920
1.4920
1.4920
1.4923
1.4923
1.4926
1.3014
1.3014
1.3014
1.3017
1.3017
1.3020
1.3026
1.3026
1.3026
1.3026
1.3026
1.3029
1.3029
1.3029
1.3029
1.3034
1.3034
1.3037
1.3037
1.3037
1.3040
1.3049
1.3049
1.3052
1.3052
1.3052
1.3052
1.3052
1.3058
1.3058
1.3058
1.3061
1.3061
1.3064
1.3064
1.3067
1.3067
1.3067
1.3073
1.3073
1.3076
1.3079
1.3082
1.3088
1.3091
1.3094
1.3094
1.3097
1.3097
1.3097
1.3100
1.3100
1.3103
1.1817
1.1817
1.1817
1.1820
1.1820
1.1823
1.1828
1.1828
1.1828
1.1828
1.1828
1.1831
1.1831
1.1831
1.1831
1.1836
1.1836
1.1839
1.1839
1.1839
1.1841
1.1850
1.1850
1.1852
1.1852
1.1852
1.1852
1.1852
1.1858
1.1858
1.1858
1.1860
1.1860
1.1863
1.1863
1.1866
1.1866
1.1866
1.1871
1.1871
1.1874
1.1877
1.1879
1.1885
1.1887
1.1890
1.1890
1.1893
1.1893
1.1893
1.1895
1.1895
1.1898
221
District-Sector Matrix for APSL
465
466
467
468
469
470
471
472
473
474
475
476
477
478
479
480
481
482
483
484
485
486
487
488
489
490
491
492
493
494
495
496
497
498
499
500
501
502
503
504
505
506
507
508
509
510
511
512
513
514
515
516
Godda
Budaun
Hingoli
Kulgam
Champhai
Nadia
Kanshiram Nagar
Mirzapur
Bongaigaon
Sant Ravidas Nagar
Sahibganj
Gaya
Arwal
Vidisha
Malkangiri
Guna
Ahmednagar
North And Middle
Andaman
Sheikhpura
Maharajganj
Balrampur
Dhamtari
Burhanpur
Mahasamund
Jalor
Simdega
Korba
Jalpaiguri
Kheri
Doda
Latur
Chhatarpur
Mandla
Sant Kabir Nagar
Rohtas
Nabarangapur
Kushi
Begusarai
Darrang
Panna
Osmanabad
Jashpur
Jehanabad
Vaishali
Pratapgarh
West Khasi Hills
Seoni
Lakhisarai
West Nimar
Poonch
Shopian
Bastar
Jharkhand
Uttar Pradesh
Maharashtra
Jammu & Kashmir
Mizoram
West Bengal
Uttar Pradesh
Uttar Pradesh
Assam
Uttar Pradesh
Jharkhand
Bihar
Bihar
Madhya Pradesh
Odisha
Madhya Pradesh
Maharashtra
Andaman & Nicobar
Islands
Bihar
Uttar Pradesh
Uttar Pradesh
Chhattisgarh
Madhya Pradesh
Chhattisgarh
Rajasthan
Jharkhand
Chhattisgarh
West Bengal
Uttar Pradesh
Jammu & Kashmir
Maharashtra
Madhya Pradesh
Madhya Pradesh
Uttar Pradesh
Bihar
Odisha
Uttar Pradesh
Bihar
Assam
Madhya Pradesh
Maharashtra
Chhattisgarh
Bihar
Bihar
Rajasthan
Meghalaya
Madhya Pradesh
Bihar
Madhya Pradesh
Jammu & Kashmir
Jammu & Kashmir
Chhattisgarh
1.1901
1.1901
1.1904
1.1906
1.1906
1.1906
1.1909
1.1909
1.1909
1.1914
1.1914
1.1914
1.1914
1.1917
1.1917
1.1917
1.1920
1.4930
1.4930
1.4933
1.4937
1.4937
1.4937
1.4940
1.4940
1.4940
1.4947
1.4947
1.4947
1.4947
1.4950
1.4950
1.4950
1.4953
1.3106
1.3106
1.3109
1.3112
1.3112
1.3112
1.3115
1.3115
1.3115
1.3121
1.3121
1.3121
1.3121
1.3124
1.3124
1.3124
1.3127
1.1901
1.1901
1.1904
1.1906
1.1906
1.1906
1.1909
1.1909
1.1909
1.1914
1.1914
1.1914
1.1914
1.1917
1.1917
1.1917
1.1920
1.1920
1.1922
1.1922
1.1922
1.1925
1.1925
1.1925
1.1928
1.1931
1.1931
1.1931
1.1931
1.1933
1.1933
1.1933
1.1933
1.1936
1.1939
1.1939
1.1941
1.1941
1.1941
1.1944
1.1947
1.1947
1.1947
1.1949
1.1949
1.1952
1.1952
1.1955
1.1955
1.1955
1.1955
1.1958
1.4953
1.4957
1.4957
1.4957
1.4960
1.4960
1.4960
1.4964
1.4967
1.4967
1.4967
1.4967
1.4970
1.4970
1.4970
1.4970
1.4974
1.4977
1.4977
1.4981
1.4981
1.4981
1.4984
1.4987
1.4987
1.4987
1.4991
1.4991
1.4994
1.4994
1.4998
1.4998
1.4998
1.4998
1.5001
1.3127
1.3130
1.3130
1.3130
1.3133
1.3133
1.3133
1.3136
1.3139
1.3139
1.3139
1.3139
1.3142
1.3142
1.3142
1.3142
1.3144
1.3147
1.3147
1.3150
1.3150
1.3150
1.3153
1.3156
1.3156
1.3156
1.3159
1.3159
1.3162
1.3162
1.3165
1.3165
1.3165
1.3165
1.3168
1.1920
1.1922
1.1922
1.1922
1.1925
1.1925
1.1925
1.1928
1.1931
1.1931
1.1931
1.1931
1.1933
1.1933
1.1933
1.1933
1.1936
1.1939
1.1939
1.1941
1.1941
1.1941
1.1944
1.1947
1.1947
1.1947
1.1949
1.1949
1.1952
1.1952
1.1955
1.1955
1.1955
1.1955
1.1958
222
District-Sector Matrix for APSL
517
518
519
520
521
522
523
524
525
526
527
528
529
530
531
532
533
534
535
536
537
538
539
540
541
542
543
544
545
546
547
548
549
550
551
552
553
554
555
556
557
558
559
560
561
562
563
564
565
566
567
568
569
Dakshin Dinajpur
Mandsaur
Ramban
Siddharthanagar
Bilaspur
Upper Siang
Purba Medinipur
Tapi
Umaria
Gadchiroli
East Garo Hills
Ashoknagar
Pakaur
Lower Subansiri
Kawardha
Kishtwar
Panch Mahal
Kaushambi
Barpeta
Bahraich
Murshidabad
Samastipur
Chirang
Jalgaon
Banas Kantha
Karimganj
Saran
Morigaon
Maldah
Hailakandi
Nagaon
Nagaur
Kupwara
Jamui
Giridih
Dahod
Dantewada
Balaghat
Jaintia Hills
Kokrajhar
Badgam
Saharsa
Tikamgarh
West Garo Hills
Sidhi
Latehar
Dhule
South 24 Parganas
Bandipore
Chatra
Darbhanga
Singrauli
Puruliya
West Bengal
Madhya Pradesh
Jammu & Kashmir
Uttar Pradesh
Chhattisgarh
Arunachal Pradesh
West Bengal
Gujarat
Madhya Pradesh
Maharashtra
Meghalaya
Madhya Pradesh
Jharkhand
Arunachal Pradesh
Chhattisgarh
Jammu & Kashmir
Gujarat
Uttar Pradesh
Assam
Uttar Pradesh
West Bengal
Bihar
Assam
Maharashtra
Gujarat
Assam
Bihar
Assam
West Bengal
Assam
Assam
Rajasthan
Jammu & Kashmir
Bihar
Jharkhand
Gujarat
Chhattisgarh
Madhya Pradesh
Meghalaya
Assam
Jammu & Kashmir
Bihar
Madhya Pradesh
Meghalaya
Madhya Pradesh
Jharkhand
Maharashtra
West Bengal
Jammu & Kashmir
Jharkhand
Bihar
Madhya Pradesh
West Bengal
1.1960
1.1963
1.1963
1.1963
1.1966
1.1966
1.1966
1.1966
1.1971
1.1974
1.1974
1.1974
1.1976
1.1976
1.1979
1.1979
1.1987
1.1987
1.1990
1.1993
1.1993
1.1993
1.1993
1.1995
1.1998
1.1998
1.1998
1.2001
1.2001
1.2003
1.2006
1.2006
1.2009
1.2012
1.2012
1.2012
1.2014
1.2017
1.2020
1.2022
1.2025
1.2028
1.2028
1.2030
1.2033
1.2033
1.2033
1.2039
1.2039
1.2041
1.2049
1.2049
1.2052
1.5004
1.5008
1.5008
1.5008
1.5011
1.5011
1.5011
1.5011
1.5018
1.5021
1.5021
1.5021
1.5025
1.5025
1.5028
1.5028
1.5038
1.5038
1.5042
1.5045
1.5045
1.5045
1.5045
1.5048
1.5052
1.5052
1.5052
1.5055
1.5055
1.5058
1.5062
1.5062
1.5065
1.5069
1.5069
1.5069
1.5072
1.5075
1.5079
1.5082
1.5086
1.5089
1.5089
1.5092
1.5096
1.5096
1.5096
1.5103
1.5103
1.5106
1.5116
1.5116
1.5119
1.3171
1.3174
1.3174
1.3174
1.3177
1.3177
1.3177
1.3177
1.3183
1.3186
1.3186
1.3186
1.3189
1.3189
1.3192
1.3192
1.3201
1.3201
1.3204
1.3207
1.3207
1.3207
1.3207
1.3210
1.3213
1.3213
1.3213
1.3216
1.3216
1.3219
1.3222
1.3222
1.3225
1.3228
1.3228
1.3228
1.3231
1.3234
1.3237
1.3240
1.3243
1.3246
1.3246
1.3249
1.3252
1.3252
1.3252
1.3257
1.3257
1.3260
1.3269
1.3269
1.3272
1.1960
1.1963
1.1963
1.1963
1.1966
1.1966
1.1966
1.1966
1.1971
1.1974
1.1974
1.1974
1.1976
1.1976
1.1979
1.1979
1.1987
1.1987
1.1990
1.1993
1.1993
1.1993
1.1993
1.1995
1.1998
1.1998
1.1998
1.2001
1.2001
1.2003
1.2006
1.2006
1.2009
1.2012
1.2012
1.2012
1.2014
1.2017
1.2020
1.2022
1.2025
1.2028
1.2028
1.2030
1.2033
1.2033
1.2033
1.2039
1.2039
1.2041
1.2049
1.2049
1.2052
223
District-Sector Matrix for APSL
570
571
572
573
574
575
576
577
578
579
580
581
582
583
584
585
586
587
588
589
590
591
592
593
594
595
596
597
598
599
600
601
602
603
604
605
606
607
608
609
610
611
612
613
614
615
616
617
618
619
620
West Sikkim
Shivpuri
Janjgir-champa
Supaul
Garhwa
Barmer
Karauli
Kishanganj
Nawada
Khagaria
Dhemaji
Upper Subansiri
Purnia
Dindori
Goalpara
Dholpur
Purbi Champaran
Madhubani
Lohit
Barwani
Madhepura
Sitamarhi
Uttar Dinajpur
Tirap
Mewat
Banka
Katihar
Morena
Lower Dibang
Jhabua
Paschimi Champaran
Anjaw
Wokha
Narainpur
Bijapur
Sheohar
Zunheboto
Sheopur
Bhind
Araria
Nandurbar
Baksa
Phek
Senapati
Dhubri
Chandel
Chunglang
Churachandpur
Lawngtlai
Alirajpur
Tuensang
Sikkim
Madhya Pradesh
Chhattisgarh
Bihar
Jharkhand
Rajasthan
Rajasthan
Bihar
Bihar
Bihar
Assam
Arunachal Pradesh
Bihar
Madhya Pradesh
Assam
Rajasthan
Bihar
Bihar
Arunachal Pradesh
Madhya Pradesh
Bihar
Bihar
West Bengal
Arunachal Pradesh
Haryana
Bihar
Bihar
Madhya Pradesh
Arunachal Pradesh
Madhya Pradesh
Bihar
Arunachal Pradesh
Nagaland
Chhattisgarh
Chhattisgarh
Bihar
Nagaland
Madhya Pradesh
Madhya Pradesh
Bihar
Maharashtra
Assam
Nagaland
Manipur
Assam
Manipur
Arunachal Pradesh
Manipur
Mizoram
Madhya Pradesh
Nagaland
1.2052
1.2052
1.2052
1.2052
1.2052
1.2055
1.2055
1.2063
1.2066
1.2066
1.2068
1.2068
1.2068
1.2074
1.2074
1.2082
1.2084
1.2087
1.2093
1.2093
1.2095
1.2101
1.2101
1.2103
1.2106
1.2106
1.2106
1.2106
1.2109
1.2111
1.2114
1.2117
1.2130
1.2133
1.2136
1.2138
1.2147
1.2149
1.2152
1.2152
1.2160
1.2163
1.2163
1.2184
1.2190
1.2203
1.2211
1.2219
1.2230
1.2257
1.2257
1.5119
1.5119
1.5119
1.5119
1.5119
1.5123
1.5123
1.5133
1.5136
1.5136
1.5140
1.5140
1.5140
1.5147
1.5147
1.5157
1.5160
1.5163
1.5170
1.5170
1.5174
1.5180
1.5180
1.5184
1.5187
1.5187
1.5187
1.5187
1.5191
1.5194
1.5197
1.5201
1.5218
1.5221
1.5224
1.5228
1.5238
1.5241
1.5245
1.5245
1.5255
1.5258
1.5258
1.5285
1.5292
1.5309
1.5319
1.5329
1.5343
1.5377
1.5377
1.3272
1.3272
1.3272
1.3272
1.3272
1.3275
1.3275
1.3284
1.3287
1.3287
1.3290
1.3290
1.3290
1.3296
1.3296
1.3305
1.3308
1.3311
1.3317
1.3317
1.3320
1.3326
1.3326
1.3329
1.3332
1.3332
1.3332
1.3332
1.3335
1.3338
1.3341
1.3344
1.3359
1.3362
1.3365
1.3367
1.3376
1.3379
1.3382
1.3382
1.3391
1.3394
1.3394
1.3418
1.3424
1.3439
1.3448
1.3457
1.3469
1.3498
1.3498
1.2052
1.2052
1.2052
1.2052
1.2052
1.2055
1.2055
1.2063
1.2066
1.2066
1.2068
1.2068
1.2068
1.2074
1.2074
1.2082
1.2084
1.2087
1.2093
1.2093
1.2095
1.2101
1.2101
1.2103
1.2106
1.2106
1.2106
1.2106
1.2109
1.2111
1.2114
1.2117
1.2130
1.2133
1.2136
1.2138
1.2147
1.2149
1.2152
1.2152
1.2160
1.2163
1.2163
1.2184
1.2190
1.2203
1.2211
1.2219
1.2230
1.2257
1.2257
224
District-Sector Matrix for APSL
621
622
623
624
625
626
627
628
629
630
631
632
East Kameng
Peren
Longleng
Bishnupur
Thoubal
Ukhrul
Imphal East
Tamenglong
South Garo Hills
Mon
Kiphire
Kurung Kumey
Arunachal Pradesh
Nagaland
Nagaland
Manipur
Manipur
Manipur
Manipur
Manipur
Meghalaya
Nagaland
Nagaland
Arunachal Pradesh
1.2265
1.2273
1.2282
1.2295
1.2352
1.2371
1.2373
1.2381
1.2390
1.2398
1.2417
1.2449
1.5387
1.5397
1.5407
1.5424
1.5495
1.5519
1.5523
1.5533
1.5543
1.5553
1.5577
1.5617
1.3507
1.3516
1.3525
1.3540
1.3602
1.3623
1.3626
1.3635
1.3644
1.3653
1.3674
1.3709
1.2265
1.2273
1.2282
1.2295
1.2352
1.2371
1.2373
1.2381
1.2390
1.2398
1.2417
1.2449
225
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End Notes
END NOTES
1
Source: Fourth All-India Census of Micro, Small and Medium Enterprises, 2006-07, Ministry of Micro,
Small & Medium Enterprises, Government of India, see:
http://fisme.org.in/document/FinalReport010711.pdf
2
Source: Keynote address by Dr. D Subbarao, August 2013, see:
http://rbi.org.in/Scripts/BS_SpeechesView.aspx?Id=827
3
Source: Gupta (2011), see: http://www.rbi.org.in/scripts/bs_viewcontent.aspx?Id=2598
4
Source: The Indian Telecom Services Performance Indicators April-June 2013, TRAI, December 2013,
see:
http://www.trai.gov.in/WriteReadData/PIRReport/Documents/Indicator%20Reports%20-%20Jun02122013.pdf
5
Rajan (2009), Page 21.
6
Rajan (2009), Page 6.
7
Ability to transfer and receive money from other accounts without any transaction limits.
8
Safety of account balances from the failure of the financial institution.
9
Security of the account from identity theft.
10
Burgess & Pande (2005).
11
Honohan (2004).
12
Beck, Demirguc-Kunt, and Levine (2007).
13
Rajan & Zingales (1996).
14
Source: World Development Indicators, World Bank, see:
http://data.worldbank.org/indicator/FS.AST.DOMS.GD.ZS/countries/IN-CN-XM-XP-XD?display=graph
15
McKinsey and Company (2012).
16
Estimation methodology: Assuming that a third of India‘s GDP is attributable to rural GDP (or Rs. 31.5
lakh crore), each of the 265,000 Gram Panchayats on average have a GDP of Rs. 12 crore.
17
Source: IFMR Trust, Data indicates that the total Life Insurance potential for a branch servicing 2170
households is in the range of Rs. 75 crore, which works out to an average sum assured requirement of
Rs. 3.5 lakh per household.
18
Based on a rural population of 83.3 crore spread over 265,000 Gram Panchayats.
19
All maps have been prepared on Quantum GIS Project 1.8.0. The shape file used plots 594 districts
for India. While Census 2011 has 640 districts, RBI district-level data are available for 644 districts, and
State level Planning Commission data (GDDP) are available for 556 districts, causing some of the newer
districts to be excluded due to non-availability of data. In districts for which urban or rural population
is given as zero as per Census 2011 (such as for Kolkata, Mumbai, Chennai, Hyderabad, Yanam, Mahe,
Kinnaur, Lahaul & Spiti, and Nicobars), the minimum value for the metric being estimated has been
applied as deemed appropriate in the estimation methodologies followed for each map. Due to
adjustments made for the lack of complete data and other such anomalies, minor artefacts could be
envisaged in the maps generated.
20
Estimation methodology: Since data for unique number of individuals having at least one bank
account is not available currently, this was estimated using the assumption that an individual belonging
to an urban area holding a bank account would be holding on an average 4 bank accounts, and an
individual belonging to a rural area holding a bank account would be holding on an average 1.5 bank
accounts (Chattopadhyay (2011) indicates that Kolkata has 301 bank accounts per 100 adult persons,
and from Census data it is known that 68% of urban households in India avail banking services). Using
these assumptions, the overall India number was estimated to be 36% (of eligible population having at
least 1 bank account, eligible population being individuals aged 18 years and above based on Census
2011). Data on number of savings bank accounts in Scheduled Commercial Banks per district was
obtained from RBI for 2012.
21
Demirguc-Kunt & Klapper (2012).
22
Wright et al (2013) found that 25% of CSPs surveyed were not in a position to process transactions as
they had no equipment, inadequate cash to meet customer withdrawal requests or had stopped
offering BC services altogether.
233
End Notes
23
No.43: Payment System Indicators, Payment and Settlement Systems, RBI Bulletin, June 2013, see:
http://www.rbi.org.in/scripts/BS_ViewBulletin.aspx?Id=14653
24
Estimation Methodology: For rural, the sum of State-level rural branches of Scheduled Commercial
Banks, all offices of StCBs and DCCBs, rural ATMs (assumed to be 10% of all State level ATMs, as is the
case for whole of India), and rural BC Outlets, rural POS terminals have been summed up and allocated
to each district within the state based on the proportion of rural de-duped bank accounts for the
district (as estimated in Figure 2.1). For urban, the same has been calculated for State-level urban
branches of Scheduled Commercial Banks, UCB branches, urban ATMs, urban BC Outlets and urban POS
terminals. For urban and rural BC Outlets numbers have been compiled by MicroSave for the Committee
based on information updated on the Ministry of Finance website (excludes Uttar Pradesh). While data
for POS terminals is not available at a district level, the total for India has been attributed to districts
on similar lines to ATMs. Data for Scheduled Commercial Banks, StCBs and DCCBs (branches) were
obtained as on end March 2013 and 2012 from Statistical Tables Relating to Banks in India, 2012-13,
and for UCBs for March 2013, from Report on Trend and Progress of Banking in India 2012-13. Data for
ATMs and POS terminals are obtained for 2012-13 from RBI‘s ATM and Card statistics, June 2013, and
Payment System Indicators, June 2013 respectively.
25
Ablett et al (2007).
26
Source: India Post, see: http://www.indiapost.gov.in/Money_Remittance_Services.aspx
27
Source: Airtel Money, see: http://www.airtel.in/money/limit-and-charges
28
Source: Data for Savings Deposit Rate and Term Deposit Rate >1 year is obtained from RBI Weekly
Statistical Supplement, November 29, 2013, see:
http://rbidocs.rbi.org.in/rdocs/Wss/PDFs/05T_FWS061213.pdf; Data for Inflationary Expectation
obtained from Ministry of Statistics and Programme Implementation, 12 December 2013 (Provisional
annual inflation rate based on all India general CPI for November 2013 is 11.24%); Data for Fixed
Deposit rates is obtained from State Bank of India, November 2013 (see:
https://www.sbi.co.in/user.htm?action=viewsection&id=0,16,384,385)
29
Estimation Methodology: For urban, credit access points are sum of urban Scheduled Commercial
Bank branches and UCBs. For rural, it is the sum of rural Scheduled Commercial Bank branches, StCBs,
DCCBs and ‗viable‘ PACS. The State-level rural and urban credit access points have been allocated to
each district based on the proportion of de-duped bank accounts in rural and urban areas for each
district, as calculated for Figure 2.1. Data for ‗viable‘ PACS is obtained from NAFSCOB for 2012 while
the remaining is obtained as done for Figure 2.2.
30
Estimation methodology: While latest figures of GDDPs are not available, the GSDP for 2013
(available as datasets at www.data.gov.in) for each of the states were apportioned to their respective
districts based on specific weights. The weights were determined by arriving at an average of the
contribution of each District GDDP to the State‘s GDDP for 3 consecutive years for which GDDP data
was available. For those states which did not yet have 2012-13 GSDP, the 2011-12 GSDP was
extrapolated based on Compound Annual Growth Rates of last 2 years for which data is available. The
GSDP was apportioned to rural and urban GSDP based on broad assumptions guided by the methodology
in Estimation of Rural and Urban Income, 2004-05, Ministry of Statistics and Programme
Implementation(see:http://www.mospi.nic.in/mospi_new/upload/web_NAS_2011/pdf%20files/Estimati
n%20of%20Rural%20and%20Urban%20Income-Rev%5B1%5D.pdf), by using 2 state-level inputs, namely,
rural to total workforce for each State, and rural bank deposits to total bank deposits in the State. The
district level GDDPs were apportioned to rural and urban GDDP based on this. The District-level credit
of Scheduled Commercial Banks is from Statement No. 16, Quarterly Statistics on Deposits and Credit of
Scheduled Commercial Banks: March 2013, RBI (Data for other institutions is unavailable at the district
level). The proportion of rural and urban credit at State level (available at Statement No. 9, Quarterly
Statistics on Deposits and Credit of Scheduled Commercial Banks: March 2013, RBI) is applied across all
districts within the State. For Gujarat, Tripura, Nagaland, Goa, Daman and Diu, Puducherry and NCT of
Delhi, GDDPs for any year could not be found and therefore, the rural and urban GSDPs for each district
were calculated using rural and urban per capita income for the State and weighting it for each district
with the rural and urban populations.
234
End Notes
31
Estimation methodology: The total contribution of MSMEs to the GDP is estimated to be 17% (Source:
SMEs‘ role in India‘s Manufacturing Sector, IBEF, see: http://www.ibef.org/download/SMEs-Role-inIndian-Manufacturing.pdf). Further, Demirguc-Kunt et al (2003) estimate that SMEs contribute 15.5% of
GDP in low income countries and 39% in middle income countries), which is sub-divided into industry
and services based on the respective sector‘s overall share in GDP. The sectors in Services include
Trade, Hotels and Restaurants, Transport, Banking and Insurance, Real Estate, ownership of dwelling
and business services. (Source: Statistical Tables Relating to Banks in India, 2012-13; Planning
Commission).
32
Source: Data on credit to sectors of the economy is obtained from Table 1.9, Basic Statistical Returns
of Scheduled Commercial Banks in India - Volume 41, March 2012; Data on GDP is obtained from
Planning Commission.
33
Source: Submission to the Committee by IFMR Trust states that rate of interest charged by informal
sources for credit range from 24% to 150% in Dasapur of Ganjam District in Orissa. Based on this
submission, we assume that an individual without access to a bank or an NBFC will borrow at 65%.
34
Source: Data on NPAs and interest rates for a personal loan borrower is obtained from the ICICI Bank
Annual Report 2012-13 (see Gross NPA Ratio for Personal Loans of ICICI Bank) and www.deal4loans.com
respectively; Data on NPAs and interest rates for an SHG borrower is obtained from Nair & Tankha
(2013) and EDA Rural Systems and Andhra Pradesh Mahila Abhivruddhi Society (AMPAS) (2006)
respectively; Data on NPAs for a JLG borrower is obtained from MFIN Micrometer (March 2013) (PAR 180
for non-AP MFIs, FY 2012-13) and the interest rate is assumed to be 26%; The NPAs for a money lender
borrower are assumed to be the same as the JLG rate and the interest rate is assumed to be 65% (refer
End Note 33) ;Data on NPAs and interest rate for a home loan borrower is obtained from ICRA and MPS
Performance Report, 2012(An approximation without controlling for effect of LTV, seasoning, ticket
size and nature of borrower, calculated on a set of MBS pools from multiple HFCs and some banks) and
State Bank of India, December 2013 (SBI‘s Floating rate home loan, as on Dec 1, 2013) respectively.
35
Adjusted for a uniform loan-to-value ratio.
36
Return on 91 day T-Bills, as on December 16, 2013 is 8.77%.
37
The observed default rate.
38
Return on 365 day T-Bills, as on December 16, 2013 is 8.85%.
39
Estimation methodology: While latest figures of GDDPs are not available, the GSDP for 2013
(available as datasets at www.data.gov.in) for each of the states were apportioned to their respective
districts based on specific weights. The weights were determined by arriving at an average of the
contribution of each District GDDP to the State‘s GDDP for 3 consecutive years for which GDDP data
was available. For those states which did not yet have 2012-13 GSDP, the 2011-12 GSDP was
extrapolated based on CAGRs of last 2 years for which data is available. The GSDP was apportioned to
rural and urban GSDP based on broad assumptions guided by the methodology in Estimation of Rural
and Urban Income, 2004-05, Ministry of Statistics and Programme Implementation (see:
http://www.mospi.nic.in/mospi_new/upload/web_NAS_2011/pdf%20files/Estimatin%20of%20Rural%20a
nd%20Urban%20Income-Rev%5B1%5D.pdf), by using 2 state-level inputs, namely, rural to total
workforce for each State, and rural bank deposits to total bank deposits in the State. The district level
GDDPs were apportioned to rural and urban GDDP based on this. The District-level deposits of
Scheduled Commercial Banks is from Statement No. 16, Quarterly Statistics on Deposits and Credit of
Scheduled Commercial Banks: March 2013, RBI (Data for other institutions is unavailable at the district
level). The proportion of rural and urban deposits at State level (available at Statement No. 9,
Quarterly Statistics on Deposits and Credit of Scheduled Commercial Banks: March 2013, RBI) is applied
across all districts within the State. For Gujarat, Tripura, Nagaland, Goa, Daman and Diu, Puducherry
and NCT of Delhi, GDDPs for any year could not be found and therefore, the rural and urban GSDPs for
each district were calculated using rural and urban per capita income for the State and weighting it for
each district with the rural and urban populations.
40
Source: Data on schemes offered at India Post is obtained from India Post Annual Report, 2012-13
(Outstanding balance under all National Savings Schemes and Saving Certificates in India Post); Data on
Employees Provident Fund is obtained from EPFO Annual Report 2011-12 (Investment Corpus as on 31st
235
End Notes
March 2012); Data on NPS is obtained from the RBI Financial Stability Report, June 2013; Data on
Mutual Funds is obtained from www.amfiindia.com; Data on Public Provident Funds is not available;
NPS includes NPS-Main for the private sector as well as government, and NPS-Lite.
41
Source: Axis Bank BSBDA offered at a KGFS branch charges Rs.100 as annual account maintenance
fees. This has been used to compute the charges on a savings account; Data on Fixed Deposit is
obtained from State Bank of India; Data on Money Market Mutual Fund is obtained from UTI Money
Market Fund. Further, to compute charges on a Money Market Mutual Fund, we assume that a new
investor pays Rs.150 to the distributor, and up to 2.5% of investment as annual recurring expenses to
the AMC; Data on Index Mutual Fund is obtained from www.quantumamc.com. Further, to compute the
charges on an Index mutual fund, we assume that a new investor pays Rs.150 to the distributor, and up
to 2.5% of investment as annual recurring expenses to the AMC; Data on Pension Fund is obtained from
the NPS-Lite Offer Document, PFRDA (Account opening charge of Rs.35, Annual maintenance charge of
Rs.50, and 0.0009% p.a as PFM charges); Data on Endowment Policy is obtained from the Life Insurance
Corporation of India (An indicative example taken is LIC‘s Endowment Plus Unit Linked Plan see
http://www.licindia.in/endowment%20plus_features.htm). Further, to compute charges on an
Endowment Policy, we assume the following: allocation charge of 7.5% of the premium for 1 st year, 5%
for 2nd to 5th year, 3% thereafter; policy administration charges of Rs.30 per month for 1 st policy year,
increasing by 3% p.a throughout the policy term; fund management charge of 0.5% to 0.8% based on
nature of fund.
42
Source: Handbook on Indian Insurance Statistics, 2011-12, IRDA.
43
Source: Data on Annual Term Life Insurance Policy is obtained from IFMR Rural Finance; Data on
Single premium Life Insurance Policy is obtained from IRDA Non-Linked Insurance Products, 2013; Data
on General Insurance is obtained from IRDA Corporate Agent Regulations 2002, and IRDA Insurance
Broker Regulations 2002.
44
Source: Address and Area of Operation of Banking Ombudsman, RBI, see:
http://www.rbi.org.in/Scripts/bs_viewcontent.aspx?Id=164
45
Rajan (2009), Page 13.
46
See Acharya et al (2011) for a detailed discussion on the role of GSEs in the US credit crisis.
47
The concept of Mutuals such as cooperatives and self-help groups are a notable exception to this
principle though it is a subject of intense debate if such Mutuals are indeed able to offer their
constituents a degree of protection that is comparable to that offered by more traditional structured
financial institutions such as Commercial Banks which need to adhere to much stricter capital adequacy
rules.
48
The Doctrine of Indoor Management lays down that persons dealing with a company having satisfied
themselves that the proposed transaction is not in its nature inconsistent with the memorandum and
articles, are not bound to inquire the regularity of any internal proceeding, see:
http://www.legalserviceindia.com/article/l203-Indoor-Management.html
49
Report of the suicide of an agent of an illegal finance company that could not meet its obligations,
see: http://www.indianexpress.com/news/chit-fund-agent-commits-suicide/1121648/
50
See Merton et al (1995) for a detailed discussion on the merits of the functional approach.
51
Rajan (2009), Page 9 refers to it as the ―Grand Bargain‖ that needs to be unwound.
52
Handbook of Statistics of the Indian Economy, 2012-13.
53
State Bank of India is by far India‘s largest Bank and has a network of 13,000 branches.
54
Sahasranaman & George (2013) found that the direct origination by Scheduled Commercial Banks
through bank branches produces very high costs in comparison to intermediation by localised lenders.
55
The evidence appears to find that concentrated banking systems are more stable and less prone to
crises because the argument is that they can be more tightly supervised and regulated – Australia and
Canada which have such systems also happen to be two countries which almost entirely escaped the
impact of the recent crisis. India has a similar banking system with the top five banks accounting for
more than 90% of the assets of the banking system. It has the added feature that government owned
banks account for more than 85% of the banking systems‘ assets.
236
End Notes
56
Sa-dhan & Citi Foundation (2012) found that the most serious challenge faced by the BC system is its
commercial viability.
57
Mishkin (2013).
58
Federal Deposit Insurance Corporation (2012) found that in the period from 1984 to 2011 the share of
US banking assets held by community banks declined from 38% to 14%. Over this period, the number of
banks with assets less than USD 25 million declined by 96%. Meanwhile, the largest banks—those with
assets greater than $10 billion—grew eleven fold in size over this period, raising their share of industry
assets from 27 per cent in 1984 to 80 per cent in 2011.
59
Brownbridge (1998) points out that imprudent management of local financial institutions in Africa
which led to their failures were indicative of serious deficiencies in bank regulation and supervision.
When many of the banks were set up in the 1980s or early 1990s, banking legislation was outdated and
Central Bank supervision departments were seriously understaffed.
60
Fitch (2007) found that residential mortgages originated in the USA between 2006 and 2007 with high
FICO scores under-performed substantially and that the credit scoring model was susceptible to fraud,
not picking up on obviously suspicious items on credit reports. For instance, the FICO scores were not
taking into account fraud or other alerts on credit reports, as also inconsistent social security numbers
and dates of birth information. In another study analysing subprime mortgages between 1997 and 2006,
Rajan et al (2010), find that as the level of securitisation increased, lenders originated loans that rated
high on characteristics reported to investors, even if unreported variables implied a lower credit
quality. They also find that over time lenders set interest rates based only on variables reported to
investors, ignoring other credit relevant information, which resulted in interest rates becoming
increasingly more unreliable predictors of default over time.
61
Peterson (2004) argued that large banks are more likely to have multiple layers of management and
thus the oversight of loans in this context implies that they rely more on hard information. Berger et al
(2005) find that larger banks are more likely to lend to more distance customers and communicate with
the borrower more impersonally.
62
Investment Banks emerge from this structure and large money-centre banks in the USA such as J.P.
Morgan and Morgan Stanley are good examples of such institutions. The large life insurance companies
are the closest parallel to such a structure.
63
Prizm currently owns and operates over 10,000 ATMs.
64
―Why does Kenya lead the World in Mobile Money‖, The Economist, May 2013, see:
http://www.economist.com/blogs/economist-explains/2013/05/economist-explains-18
65
Kashyap et al (2002) argue that ―since banks often lend via commitments, their lending and deposittaking may be two manifestations of one primitive function: the provision of liquidity on demand.
There will be synergies between the two activities to the extent that both require banks to hold large
balances of liquid assets. If deposit withdrawals and commitment takedowns are imperfectly
correlated, the two activities can share the costs of the liquid-asset stockpile‖.
66
RBI (2012) provides a detailed discussion, see:
http://rbi.org.in/scripts/PublicationVisionDocuments.aspx?ID=664
67
Source: National Electronic Clearing Service, Procedural Guidelines, Reserve Bank of India, October
2008, see: http://rbidocs.rbi.org.in/rdocs/Content/PDFs/87706.pdf
68
Source: RBI FAQs on NEFT, November 12, 2012, see:
http://www.rbi.org.in/scripts/FAQView.aspx?Id=60
69
Source: RBI FAQs on RTGS, August 30, 2013, see: http://www.rbi.org.in/scripts/FAQView.aspx?Id=65
70
Source: NPCI FAQs on IMPS, see: http://www.npci.org.in/impsFaqCust.aspx
71
Source: White Label ATMs in India – Guidelines, June 20, 2012, see:
http://rbidocs.rbi.org.in/rdocs/notification/PDFs/CWLA200612_F.pdf
72
Source: RBI Bankwise ATM/POS/Card statistics, August 2013, see:
http://www.rbi.org.in/scripts/ATMView.aspx?atmid=30
73
Source: Issuance and Operation of Pre-paid Payment Instruments in India (Reserve Bank) Directions,
2009, see: http://rbidocs.rbi.org.in/rdocs/notification/PDFs/RFGF280409.pdf
237
End Notes
74
Source: RBI Master Circular – Mobile Banking Transactions in India – Operative Guidelines for Banks,
July 1, 2013, see: http://rbidocs.rbi.org.in/rdocs/notification/PDFs/116MCMB030713.pdf
75
Source: RBI Guidelines for engaging of Business Correspondents (BCs), September 28, 2010, see:
http://rbidocs.rbi.org.in/rdocs/notification/PDFs/CPC28092010.pdf
76
Source: UIDAI website, see: https://portal.uidai.gov.in/uidwebportal/dashboard.do
77
Cama (2002).
78
Ibid., Page 9.
79
Ibid., Page 10.
80
Ibid., Page 11 – 13.
81
Source: World Development Indicators, World Bank, see:
http://data.worldbank.org/indicator/SI.POV.2DAY
82
RBI (2012).
83
Radcliffe & Voorhies (2012).
84
McKinsey & Company (2010).
85
Damodaran (2011).
86
Source: Submission by Bank of Baroda to the Committee.
87
Source: RBI Circular on BSBDA, August, 2012), see:
http://rbi.org.in/scripts/NotificationUser.aspx?Id=7519&Mode=0
88
RBI (2010), see: http://www.rbi.org.in/Scripts/bs_viewcontent.aspx?Id=2344
89
―…relative shrinkage in balance sheet [of the RBI] may also have implications regarding loss
of seigniorage revenue for the central bank. This is because currency notes and coins are the interestfree liability of the central bank towards public (i.e., public have in effect lent to the central bank
such amount free of interest) which are then used by the central bank to purchase interest bearing
assets. Thus, interest earned on these assets constitutes its seigniorage revenue. Therefore, if the
central bank's operating costs are high which are more likely in an environment where central bank is
required to intervene more, it may even incur losses on account of seigniorage revenue foregone. This
may also have adverse implications for governments with chronic budget deficits as it would be
deprived of the transfer of surplus to its treasury from the profitable central bank‖, Cama (2002)
90
Source: RBI Annual Report 2012-13, see:
http://rbidocs.rbi.org.in/rdocs/AnnualReport/PDFs/P2_11RBA220813.pdf
91
Bank of International Settlements Committee on Payment and Settlement Systems (2004), Page 6,
March 2004.
92
Financial Action Task Force (2013), Paragraph 67, page 28.
93
Ibid., Paragraph 39, page 18.
94
Source: RBI KYC Guidelines Master Circular, July, 2013, Section 2.5, see:
http://www.rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=8179#f9
95
RBI guidelines on e-KYC, see:
http://www.rbi.org.in/scripts/bs_circularindexdisplay.aspx/BS_CircularIndexDisplay.aspx?Id=8397
96
RBI Master Circular on Branch Authorisation, July, 2013, see:
http://www.rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=8136
97
RBI Master Circular on Branch Licensing – RRBs, July, 2013, Sections 4 and 8, see:
http://www.rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=8184#8
98
CGAP - Branchless Banking Agents in Brazil: Building viable networks 2010, see:
http://www.slideshare.net/CGAP/branchless-banking-agents-in-brazil-building-viable-networks-2010
99
RBI Trend and Progress in Banking in India 2012-13, Table IV.33, page 84, see:
http://rbidocs.rbi.org.in/rdocs/Publications/PDFs/0RTP21112013_F.pdf
100
In its interaction with the regional/zonal heads of PSU banks and RRBs in Uttarakhand, the Committee
found that there is a saturation point for BCs' income after the initial opening of deposit accounts. The
transactions based model does not generate sufficient revenue on account of various factors such as low
population density, hilly terrain, and lack of awareness of banking products and government schemes.
101
Wright et al (2013).
102
Bill & Melinda Gates Foundation (2013).
238
End Notes
103
International Telecommunication Union (2013).
Submission by Dr. Aruna Sharma, Additional Chief Secretary, Rural Development, Government of
Madhya Pradesh to the Committee.
105
Workshop with BC Organisations, Committee on Comprehensive Financial Services for Small
Businesses and Low Income Households, New Delhi, 8th November 2013.
106
Financial Inclusion by Extension of Banking Services - Use of Business Correspondents (BCs), March
2012, RBI, see: http://www.rbi.org.in/scripts/NotificationUser.aspx?Id=7038&Mode=0
107
Submission from NABARD to the Committee.
108
As on 31 March 2013, 64 Regional Rural Banks (RRBs) function in 635 districts with loans outstanding
of Rs.1.37 lakh crore and deposits of Rs.2.11 lakh crore. Rural Cooperative Credit Institutions comprise
31 StCBs and 370 DCCBs that function through 92,432 PACS at the village level (of which 66813 are
categorised as Viable). The credit outstanding for StCBs and DCCBs stood at Rs.77,644 crore and Rs.
1.57 lakh crore respectively, and they had deposits of Rs.86,430 crore and Rs.1.88 lakh crore as on
March 31 2012. There are also 1606 UCBs across 330 districts with advances and deposits of Rs.1.8 lakh
crore and Rs. 2.77 lakh crore respectively, as on March 31, 2013. Source: Data from NABARD, NAFSCOB,
RBI.
109
Submission from NABARD to the Committee.
110
Source: Certificates of Authorisation issued by the Reserve Bank of India under the Payment and
Settlement Systems Act, 2007, see: http://www.rbi.org.in/scripts/PublicationsView.aspx?id=12043
111
From discussions at the Workshop with BC Organisations, Committee on Comprehensive Financial
Services for Small Businesses and Low Income Households, New Delhi, 8th November 2013.
112
Source: Vermont status on banking and insurance, see:
http://www.leg.state.vt.us/statutes/fullchapter.cfm?Title=08&Chapter=079
113
Source: Certificates of Authorisation issued by the Reserve Bank of India under the Payment and
Settlement Systems Act, 2007, see: http://www.rbi.org.in/scripts/PublicationsView.aspx?id=12043
114
Bank of International Settlements Committee on Payment and Retail Systems (2012), pg. 82.
115
Ibid.
116
Source: Issuance and Operation of Pre-paid Payment Instruments in India (Reserve
Bank) Directions, 2009, see: http://rbidocs.rbi.org.in/rdocs/notification/PDFs/RFGF280409.pdf
117
Tarazi and Breloff (2010).
118
―New Legal and Regulatory Framework for Payment Arrangements and Payment Agents, see:
http://www.pinheironeto.com.br/publicacao/4072
119
Bank of International Settlements Committee on Payment and Retail Systems (2012), pg. 84.
120
Based on the Committee‘s interaction with Mrs. Chanda Kochhar, MD & CEO.
121
There are examples of BRAC Bank in Bangladesh setting up a subsidiary Bkash, which is focussed on
remittance services through mobile banking.
122
Submission from Oxigen to the Committee.
123
The FSLRC has proposed a separate regulatory framework for SIFIs. This is likely to have implications
for all Government-owned Banks and the larger Private Sector Banks.
124
Citigroup (2013).
125
Source: Financial Stability Report, Issue Number 7, Table 2.4, Page 32, Reserve Bank of India, June
2013.
126
Source: Page 2, Financial Stability Report, Issue Number 7, Reserve Bank of India, June 2013.
127
Source: Handbook of Statistics of the Indian Economy, 2012-13.
128
Pradhan (2013).
129
Radhakrishna (2007).
130
Thorat (2011).
131
Used on a second-loss basis, Rs. 3,073 crore could have covered over Rs. 30,000 crore of SHG
portfolio.
132
Puhazhendhi (2013).
133
Submission from Jana Foundation to the Committee.
134
Submission from Bank of Baroda to the Committee.
104
239
End Notes
135
Source: Submission from CRISIL to the Committee.
Adjusted GNPA equals GNPAs in non-priority sector including 30% of restructured standard assets
(excluding state power utilities)/advances outstanding in the non-priority sectors.
137
Based on submission from Bank of Baroda to the Committee and on the findings of the Committee on
Financial Inclusion, 2008, headed by C.Rangarajan (Annexure IV, page 129). The submission by Bank of
Baroda concludes that rural Bank branches become cost-competitive at loans above Rs.100,000.
138
Submission from Axis Bank to the Committee.
139
Berger et al (2004), Page 11.
140
Based on submissions from Bank of Baroda and CAFRAL to the Committee.
141
The Banker, June 2013 issue, Pages 16 - 21.
142
Agarwal & Hauswald (2010).
143
Provisioning for NPAs is lower in India compared to many countries including France, US, Russia,
China, Thailand, Brazil, and Mexico. This coupled with higher gross NPA levels, means that the Indian
banking system‘s net NPA levels as a percentage of capital are weaker than that in most developing
economies.
144
Source: MFIN‘s Micrometer data for all non-Andhra Pradesh MFIs FY 2011-12 and 2012-13. The
operation of AP based MFIs were severely curtailed following the AP State Government action in 2010.
145
Submission from CAFRAL to the Committee.
146
Of the 57 billion Euros in subsidy offered to farmers in 2010, there was no interest subsidy or loan
waiver component and about 70% was handed out as direct cash subsidy.
147
USA paid out direct subsidies of about $10 billion in 2010. It was careful to ensure that these
subsidies were decoupled from actual production related activities so as to ensure that there is
minimum distortion in market prices and production decisions of the farmers, see:
http://www.ers.usda.gov/topics/farm-economy/farm-commodity-policy/government-payments-thefarm-sector.aspx#.UnPAEnBmim4
148
Pendley et al (2007) find that residential mortgages originated in 2006 and 2007 with high FICO
scores under-performed substantially and that the credit scoring model was susceptible to fraud, not
picking up on obviously suspicious items on credit reports. Rhyne (2001) finds that complete
dependence on scoring for credit risk assessment can lead to adverse outcomes such as in the case of a
finance company in Bolivia which went bankrupt after introducing a credit appraisal system for
microcredit borrowers that was based only on a credit scoring model that did not take subjective risk
factors into account.
149
Wade & Magleby-Lambert (2008).
150
Submission from CAFRAL to the Committee.
151
Source: Master Circular on Para-banking Activities, July 2013, see:
http://www.rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=8196#2
152
Guidelines on Managing Risks and Code of Conduct in Outsourcing of Financial Services by banks,
November 2006, see:http://www.rbi.org.in/commonman/English/Scripts/Notification.aspx?Id=40
153
Mester (1997) provides a good overview of the benefits of credit scoring.
154
Demyanyk (2008) found that during the crisis credit scores did not predict either the true risk of
default of a subprime mortgage loan or the crisis as a whole.
155
Peterson & Rajan (2002).
156
―Citigroup to Expand Credit-Card Business in India‖, Wall Street Journal, May 25, 2012,
see: http://online.wsj.com/news/articles/SB10001424052702304707604577426011248201708
157
―Credit bureau of MFIs brings details of small borrowers to the fore‖, Business Standard, October 15,
2013, see:
http://www.business-standard.com/article/finance/credit-bureau-of-mfis-brings-details-of-smallborrowers-to-the-fore-113101500111_1.html
158
Source: Chapter 19, Draft Indian Financial Code, Report of the FSLRC
159
RBI Master Circular on Priority Sector Lending: Targets and Classification, July 2013, see:
http://rbidocs.rbi.org.in/rdocs/notification/PDFs/107010713PSLFL.pdf
160
Mukherjee (2013).
136
240
End Notes
161
Mishkin (2013).
In Maharashtra there are another set of cooperative financial institutions which are called "Pata
Sansthas" or "Pata Pheris". There are entirely unregulated, very small, completely self-funded, but
highly effective and well managed. There are about 40,000 of them in Maharashtra, have deposits of
over Rs 70,000 crore and give loans to small businesses in rural and urban areas. Almost all of the
50,000 autorickshaws plying in Mumbai have been financed by them.
163
Source: Handbook of Statistics on the Indian Economy, RBI, 2012-13.
164
Gilbert et al (2013).
165
Source: ―The Importance of Effective Corporate Governance‖, by Kevin Moore, Federal Reserve Bank
of Kansas City, Community Banking Connections, Fourth Quarter 2012., see:
http://www.communitybankingconnections.org/articles/2012/Q4/Importance-of-Effective-CorporateGovernance.cfm
166
Based on the submission from ACCION to the Committee.
167
Source: RBI has directed all UCBs to complete CBS implementation by December 31, 2013. NABARD
has also initiated a CBS project for all cooperatives.
168
Clarke (2010).
169
Rajan (2009), Page 8.
170
The Pennsylvania Department of Banking and Securities for example regulates more than 225 statechartered banks, savings associations, trusts and credit unions; licenses and registers about 14,000 nonbank lenders, including mortgage brokers and lenders, auto sales finance companies, debt management
companies, check cashers, pawnbrokers and money transmitters; enforces compliance with state and
federal laws for non-bank lenders so that consumer and business borrowers will have confidence in the
fairness of their transactions; and licenses and registers more than 190,000 securities companies and
professionals doing business with Pennsylvania residents, including agents, broker-dealers, investment
advisors and notice filers, and investment advisor representatives.
171
Based on discussions with Professor Robert DeYoung of the University of Kansas School Of Business
and the lead author of the 2004 Chicago-Fed study on ―The Past, Present, and Probable Future for
Community Banks‖.
172
Source: Report on Trend and Progress of Banking in India 2012-13, RBI.
173
Acharya (2013).
174
Submission from CRISIL to the Committee.
175
European Commission (2012).
176
Kumar et al (1997), Page 63.
177
Rajan (2009), Page 13.
178
Acharya and Oncu (2013).
179
Vide their circular SEBI/CFD/DIL/DIP/12/2004/8/4 dated 8th April 2004.
180
Source: Highlights 2012-13, NABARD, see: www.nabard.org
181
Member Lending Institutions under CGTMSE are all scheduled commercial banks, specific RRBs, NSIC,
NEDFi and SIDBI, see: http://www.cgtsi.org.in/Eligibility_criteria.aspx
182
Sane & Thomas (2013).
183
The reported overdues of 10 large MFIs in the State amounted to Rs.3174 crore by the end of March
2011. This would have adversely affected the 2.7 crore borrowers in Andhra Pradesh who relied on
microfinance institutions operating in the State. Studies find that the crisis resulted in a drop in
average household expenditure in Andhra Pradesh by 19% (Sane and Thomas (2013)). The crisis also
contaminated the SHG portfolio of banks in the State, where at the end of July 2011, about 17% of
linked groups had defaulted on their repayments, constituting a portfolio at risk of 16.7% (Puhazhendhi
(2013)). A study by MicroSave that looked at the effect on AP clients from the cessation of MFI activity
found that more than 70% of respondents had to borrow from other sources and more than 10%
reported distress sale of assets.
184
Submission from MFIN to the Committee.
185
Only loans given to households falling within specific income levels can qualify – For rural
households, the annual income must not exceed Rs.60,000, and for urban households, the income must
162
241
End Notes
not exceed Rs.120,000. This criterion completely disregards the limitations of traditional lending
mechanisms in overcoming challenges that the borrower segment has, namely, the difficulty in
estimating their incomes, the lack of reliable credit history records, and the difficulty in collateralising
their assets.
186
Loan amount cannot exceed Rs. 35,000 in the first cycle and Rs. 50,000 in subsequent cycles, and
the total indebtedness of the borrower must not exceed Rs. 50,000. Tenure of the loan cannot be less
than 24 months for loans in excess of Rs.15,000.
187
A borrower cannot be a member of more than one SHG/JLG. No more than two MFIs can lend to a
borrower. This essentially places a restriction on choice of the borrower, who if having availed a JLG
loan, will now be forced to build a savings history for 6 months before he or she can decide to carry out
the activity for which she needs financing support. The decision on whether a borrower has the
capacity to repay the loan she is seeking or not, is best left to the borrower who is taking the loan, and
the institution that is willing to underwrite such a loan with the help of available credit bureau
information.
188
Loans given for income generation should constitute at least 70% of the total loans of the MFI and
the remaining 30% can be for other purposes such as housing repairs, education, medical and other
emergencies. The distinction between income-generation and consumption is a superficial one and
questions the credibility of the borrower in her ability to make rational choices for her household.
Improving one‘s living conditions, investing in education or health, or even purchasing a two-wheeler
can have welfare-enhancing prospects for the household and the decision on how to prioritise on
expenditures is best left to the borrower household.
189
Rajan (2009), Proposal 6.
190
Statement by Dr. Raghuram Rajan on taking office on September 4, 2013.
191
A number of countries like Japan, South Korea, Columbia, Costa Rica, Brazil and China have used
directed lending to achieve a variety of goals. For instance, studies like Calomiris et al (1994) and
Horiuchi & Sui (1992) note the influence of directed lending in the growth of Japanese industries.
Similarly, Amsden (1989) argues that subsidy components of directed lending were used in South Korea
as a disciplining mechanism to enforce strict performance standards on firms.
192
Source: Master Circular on Priority Sector Lending, July 2013. RBI, see:
http://rbidocs.rbi.org.in/rdocs/notification/PDFs/107010713PSLFL.pdf
193
Ibid.
194
Estimation Methodology: Data from the IFMR Trust shows that there are 1713 small and marginal
farmer households (owning land for cultivation up to 5 acres) in the village of Karambayam, Tamil
Nadu. The total acreage amounts to 2926 acres. Assuming that all farmers in the village cultivate
paddy on their lands for 2 crop seasons in a year, and given that the scale of finance for paddy for one
crop season is about Rs.10000/acre (which is a conservative reflection of the costs of cultivation) in the
region, and assuming that 100% of the cultivation cost is financed with credit, there is a demand for
Rs.1.95 crore by small and marginal farmers at a Gram Panchayat level (since the Karambayam area
covers a population that is spread across approximately 3 Panchayats). If this were applied to all of the
2.46 lakh Panchayats in India, the total credit demand by small and marginal farmers can reasonably be
estimated at Rs.4.8 lakh crore. Further, an analysis of the per acre cost of cultivation for some of the
principal crops in 5 major producing states for each crop, indicate that it ranges from about Rs.8000
for arhar, Rs.13000 for paddy, to Rs.29000 for sugarcane (www.data.gov.in).
195
Submission from Jana Foundation to the Committee.
196
Source: RBI Handbook of Statistics on Indian Economy 2012-13.
197
Source: All India Debt and Investment Survey (2002) and Sarangi (2010).
198
Sarangi (2010).
199
RBI Master Circular on Interest Rates on Advances, July 2013, see:
http://rbidocs.rbi.org.in/rdocs/notification/PDFs/73MCIRA01072013F.pdf
200
Speaking at the Fourth Annual Credit Information Conference in Chennai, organised in December
2013, R K Dubey, chairman and managing director of Canara Bank said, "The way our credit on retail is
working, we are hopeful that the gross NPA rate to be below three per cent". He said that all the 4,500
242
End Notes
branches of Canara Bank are using the data of CIBIL while taking a decision on the loan applications
and this has helped the Bank to avoid lending to customers with higher risk. Source:
http://www.business-standard.com/article/finance/canara-bank-reduced-retail-gross-npa-using-cibilinformation-says-dubey-113120400940_1.html.
201
Source: RBI Reports on Trends and Progress of Banking in India, 2011-12.
202
Adjusted GNPA equals GNPAs in non-priority sector including 30% of restructured standard assets
(excluding state power utilities)/advances outstanding in the non-priority sectors.
203
Thorat (2011) found that there has ―.. been a distinct shift in the preference of commercial banks
towards indirect finance (IF) vis-à-vis direct finance (DF) to agriculture. Of the total credit outstanding
to agriculture, the share of indirect finance was 16% in 2000 which increased to 28% in 2006 and stood
at 24% in 2010.‖ The report also finds that credit deepening in the indirect finance category has been
much more pronounced than the direct finance category.
204
Ibid.
205
CRISIL Inclusix is a comprehensive index launched by CRISIL for measuring the progress of financial
inclusion in the country, down to the district-level. CRISIL Inclusix, whose methodology is similar to
other global indices, such as UNDP's Human Development Index, measures financial inclusion on the
three critical parameters of basic banking services - branch penetration, deposit penetration, and
credit penetration. The index uses parameters that focus only on the 'number of people' whose lives
have been touched by various financial services, rather than on the 'amounts' deposited or loaned. The
As of now, the CRISIL Inclusix index covers 632 districts over a three-year timeframe (2009-2011).
206
Estimation Methodology: GDDP numbers have been calculated as explained in End Note 30. In this
absence of district level GDP data, as is the case for all districts of Gujarat and some other districts in
the country, district level weights are calculated by using state level GDP numbers and adjusting them
using the CRISIL Inclusix to estimate district GDP. In the case of some Union Territories, when there is
no GDP data available, those districts have been left empty.
207
Most credit bureaus including Credit Information Bureau (India) Limited (CIBIL) work on the principle
of reciprocity, which means that only members who had submitted all their credit data could access
credit information reports.
208
Source: Annual Report 2011-12, Warehousing Development and Regulatory Authority.
209
Holden (1997).
210
Field & Toreno (1994).
211
India Urban Space Foundation (2011).
212
Clarke et al (2012).
213
Collier et al (2009).
214
Source: IMD Pune, see: http://www.imdpune.gov.in
215
Source: IMD, see: http://www.imd.gov.in/doc/obs_surface.htm
216
Collier et al (2009).
217
Clarke et al (2012).
218
Cole et al (2009).
219
Source: Draft Report/Guidelines for setting up Automatic Weather Stations (AWSs) and Automatic
Rain Gauge (ARGs) & their accreditation, standardisation, validation and quality management of
weather data for Implementation of Weather Based Crop Insurance Scheme (WBCIS)
220
Liberti & Mian (2010) and Fleisig (2006).
221
Alvarez de la Campa (2011).
222
Safavian at al. (2006).
223
Love et al (2013).
224
Rajan (2009), Page 164.
225
Source: Entry of NBFCs into Insurance Business, February 2004, see:
http://www.rbi.org.in/scripts/BS_NBFCNotificationView.aspx?Id=1481
226
Source: IRDA AML/CFT Guidelines 2013, see:
http://www.irda.gov.in/ADMINCMS/cms/Circulars_Layout.aspx?page=PageNo1879&flag=1
227
Source: SEBI‘s circular on Uniform KYC for the Securities Markets, October 2011, see:
243
End Notes
http://www.sebi.gov.in/cms/sebi_data/attachdocs/1317809779732.pdf
Source: Circular No: PFRDA/2013/18/PDEX/11 dated October 24, 2013, Circular on Acceptance of eKYC as valid process for KYC verification, SEBI‘s Circular No. CIR/MIRSD/ 09 /2013.
229
Source: IRDA Licensing of Corporate Agent Regulations 2002, see:
http://www.irda.gov.in/ADMINCMS/cms/frmGeneral_Layout.aspx?page=PageNo67&flag=1&mid=Insuran
ce%20Laws%20etc.%20%3E%3E%20Regulations
230
Maximum of 40% of premium for first year and 5% for renewal for life insurance; and 15% of premium
for general insurance, Source: IRDA Licensing of Corporate Agents Regulations 2002.
231
Source: IRDA Insurance Brokers Regulations 2002, see:
http://www.irda.gov.in/ADMINCMS/cms/frmGeneral_Layout.aspx?page=PageNo117&flag=1&mid=Insure
rs%20%3E%3E%20General%20%3E%3E%20Regulations
232
Banks are permitted to be brokers as per the Licensing of banks and brokers regulation 2013, see:
http://www.irda.gov.in/ADMINCMS/cms/frmGeneral_Layout.aspx?page=PageNo2038&flag=1&mid=Insur
ance%20Laws%20etc.%20%3E%3E%20Regulations
233
Maximum of 30% of premium for first year and 5% for renewal for life insurance; and 10-12.5% of
premium for general insurance.
234
Source: Draft Guidelines on Entry of Banks into Insurance Broking business, 2013, see:
http://www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=30091
235
Source: Referral Arrangement with Banks circular 2003, see:
http://www.irdaindia.org/referralargmnt.htm
236
Source: RBI Master Circular – Para-banking Activities, 2013, see:
http://www.rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=8196
237
Source: SEBI Circular for Mutual Funds, Cir/ IMD/ DF/13/ 2011, see:
http://www.sebi.gov.in/cms/sebi_data/attachdocs/1314009686727.pdf
238
Source: SEBI Investment Advisors Regulations, 2013, see:
http://www.sebi.gov.in/cms/sebi_data/attachdocs/1358779330956.pdf
239
Source: RBI - Entry of State Cooperative Banks (SCBs) / District Central Cooperative Banks (DCCBS)
into insurance business, 2005, see:
http://www.rbi.org.in/scripts/NotificationUser.aspx?Id=2244&Mode=0
240
Source: Renewal of AMFI Registration Number (ARN)/ Employee Unique Identification Number
(EUIN), see: http://portal.amfiindia.com/showhtml.aspx?page=renew_arn
241
Source: RBI Circular on Financial Inclusion by Extension of Banking Services – Use of Business
Correspondents, 2010, see: http://rbidocs.rbi.org.in/rdocs/notification/PDFs/CPC28092010.pdf
242
Kapoor & Shivshankar (2012).
243
―Syndicate Bank, Tata AIG launch micro-insurance scheme‖, 27 January 2011, The Hindu Business
Line, see:
http://www.thehindubusinessline.in/2011/01/28/stories/2011012851560700.htm
244
All Ayushman Bima Yojana, Allahabad Bank, see:
https://www.allahabadbank.in/english/Ayushman.aspx
245
Broker implies that the principal business must be insurance broking for the customer. Banks are
permitted to be brokers as per the Licensing of banks and brokers regulation 2013, see:
http://www.irda.gov.in/ADMINCMS/cms/frmGeneral_Layout.aspx?page=PageNo2038&flag=1&mid=Insur
ance%20Laws%20etc.%20%3E%3E%20Regulations
246
Maximum of 40% of premium for first year and 5% for renewal for life insurance; and 15% of premium
for general insurance.
247
IRDA Circular on Referral Arrangement, IRDA /Cir/003/2003, January 2003, see:
http://www.irdaindia.org/referralargmnt.htm; IRDA Notification, July 2010, see:
http://www.irdaindia.org/notification/sharing_database_gaz.PDF
248
Distribution of Mutual Fund products by NBFCs: DNBS (PD) CC No. 84 / 03.10.27 / 2006-07.
249
Halan et al (2013).
228
244
End Notes
250
―Saradha raised deposits from 1.7 mn people, probe finds‖, June 20, 2013, Live Mint, see:
http://www.livemint.com/Specials/TQWJ1auPZMCYnZqC4tK7VN/Saradha-raised-deposits-from-17million-people-probe-finds.html
251
Regulation for Financial Consumer Protection: Present Status and Future Directions, Opening
Remarks by Dr. K. C. Chakrabarty, see: http://www.rbi.org.in/scripts/BS_SpeechesView.aspx?Id=805
252
Housing Loans by Commercial Banks – LTV Ratio, Risk Weight and Provisioning, December 2010, see:
http://www.rbi.org.in/scripts/NotificationUser.aspx?Id=6161&Mode=0
253
Tata Institute of Social Sciences (2005) found that that the major reason for the suicides in the
region is the heavy indebtedness that the cultivators.
254
Package of Relief Measures to the Vidarbha Region in Maharashtra, July 2006, see:
http://rbidocs.rbi.org.in/rdocs/notification/PDFs/71485.pdf
255
Mid-Term Review of the Annual Policy for the year 2007- 08 – Recovery Agents engaged by banks,
see: http://www.rbi.org.in/Scripts/bs_viewcontent.aspx?Id=1237
256
―Direct selling agents keep customers an unhappy lot‖, December 2008, Financial Express, see:
http://www.financialexpress.com/news/Direct-selling-agents-keep-customers-an-unhappy-lot/402618
257
Halan et al (2013).
258
Source: Guidelines on Fair Practices Code for NBFCs – Grievance Redressal Mechanism, see:
http://rbi.org.in/Scripts/NotificationUser.aspx?Mode=0&Id=7866
259
Source: Master Circular- Loans and Advances – Statutory and Other Restrictions, July 2013, see:
http://www.rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=8135#25
260
Source: Guidelines on Fair Practices Code for NBFCs, March 2012, see:
http://rbi.org.in/scripts/NotificationUser.aspx?Id=7089&Mode=0
261
Spindler (2011).
262
Ben-Shahar & Schneider (2010).
263
Cain et al (2011).
264
Kinsey & McAlister (1981); Mandell (1973).
265
Anagol & Hugh Hoikwang Kim (2012).
266
Financial Literacy and Credit Counselling Centres (FLCCs)- Model Scheme, February 2013, see:
http://www.rbi.org.in/scripts/NotificationUser.aspx?Id=4822&Mode=0
267
Source: Data obtained from RBI
268
Financial Literacy Centres (FLCs) – Guidelines, June 2012, see:
http://www.rbi.org.in/scripts/BS_CircularIndexDisplay.aspx?Id=7259
269
Source: Data obtained from RBI.
270
Fernandes, et al (2013).
271
A scoping study of financial literacy training programmes in India, conducted by Umapathy et al
(2012) finds that although there is an improvement in beneficiaries‘ numeracy levels, the percentage
of people with knowledge of formal financial products and conceptual understanding of savings and
borrowing is still very low. Other studies have analysed the impact of specific, focussed financial
education interventions. For instance, Cole et al (2011) find that offering a 2-hour financial education
program has no effect on the general population and only a modest increase for those with low initial
levels of education. Similarly a study by Field et al (2010) also based in India, find that a 2-day training
session has no impact on the probability of saving by women working in the informal sector.
272
Source: Chapter III, Policy Environment, Report of Trends and Progress of Banking in India 2012-13;
see: http://rbidocs.rbi.org.in/rdocs/Publications/PDFs/03RTP211113C.pdf
273
Page xviii, Executive Summary, FSLRC Report Volume I. Report of the FSLRC.
274
For the complete set of requirements under the Responsible Lending Conduct guidelines, see:
http://www.asic.gov.au/asic/pdflib.nsf/LookupByFileName/rg209-published-2-September2013.pdf/$file/rg209-published-2-September-2013.pdf
275
The term ‗Substantial Hardship‘ is not defined in the National Credit Act. Australia does not propose
to give any definitive formulation of what substantial hardship means. It is expected that the law about
the meaning of ‗substantial hardship‘ will develop and become clearer as cases come before the courts
245
End Notes
and judgments are handed down. However, the use of relevant benchmarks are suggested for this
purpose:
Below a level where they do not have funds to meet their realistic living costs.
Below an amount based on a particular objective indicator (e.g. the Henderson Poverty Index plus a
certain margin.
Below the maximum applicable level of government benefits for a person.
276
Personal advice is considered to be suitable if each of the following three elements is satisfied: the
providing entity must make reasonable inquiries about the client‘s relevant personal circumstances;
the providing entity must consider and investigate the subject matter of the advice as is reasonable in
all the circumstances; and the advice must be ‗appropriate‘ for the client.
277
Source: FOS, Australia. For the complete case study, see:
http://www.fos.org.au/centric/the_circular_5_home/responsible_lending_conduct_obligations_malad
ministration.jsp
278
The entire case can be read here:
http://www.lawlink.nsw.gov.au/scjudgments/2006nswsc.nsf/6ccf7431c546464bca2570e6001a45d2/a86
34decd74561e2ca25720a007da27d?OpenDocument
279
Source: Issue 111, Ombudsman News, FOS, August-September 2013 UK, see: http://www.financialombudsman.org.uk/publications/ombudsman-news/111/111-older-people.html#cs1
280
Comprehensive Guidelines on Derivatives: Modifications, November 2011, see:
http://www.rbi.org.in/scripts/NotificationUser.aspx?Id=6793&Mode=0
281
This is similar to the process adopted by the SEC and DOJ and the Ministry of Justice in the UK with
regard to the corporate offence to prevent bribery- firms are required to have in place ―adequate
procedures‖ and if they can demonstrate that adequate procedures were in place, the same is a
defence for the firm.
282
The Banking Ombudsman Scheme is fully funded and managed by India‘s Central Bank – bank
customers can lodge a complaint with any of the 15 offices of the Banking Ombudsman situated across
the country, on 27 different grounds of ―deficiency in banking services‖.
283
Mystery shopping is a supervisory tool used by regulators across the world, and is considered to be
among the more intrusive approaches to supervision of market players. The Financial Services Authority
(FSA) undertook a mystery shopping review of the quality of investment advice in the retail banking
sector between March-September 2012, specifically to check whether firms were giving their customers
suitable investment advice. The exercise spanned 231 mystery shops across 6 large firms in UK. The
representatives of the exercise posed as customers looking to invest a lump sum and were seeking
investment advice. While three-fourths of the mystery shop customers received good advice, the
quality of advice was under question for the remaining one-fourth. All 6 firms exhibited some form of
‗poor advice‘ – where customers were at a risk of suffering detriment as a result of being
recommended products that were not suitable for their needs and circumstances. Poor advice reflects
a breach of FSA‘s Conduct of Business (COBS) Rules and the FSA‘s Principles for Businesses,
see: http://www.fsa.gov.uk/static/pubs/other/thematic_assessing_retail_banking.pdf
284
Rajan (2009), Page 142, Chapter 6.
285
―Special unit to keep tabs on financial institutions‖, Times of India, August 18, 2013:
http://articles.timesofindia.indiatimes.com/2013-08-18/chennai/41422444_1_special-unit-financialinstitutions-several-people
286
Objective - Friends of Police, see:: http://friendsofpolice.com/FOP_Concept_Objectives.htm
287
Source: RBI BSR Table No. 3.1, see: http://www.rbi.org.in/scripts/PublicationsView.aspx?id=15076
288
It is important to recognise that there may exist a great variation in the spread of a given population
which makes population density more salient than the actual population for the purpose of
measurement. Accordingly, for measuring the progress towards ubiquity of payment network, the
suggested metric combines area and density (patches of 1 square KM with population density of 400 or
more).
289
Source: G20 Financial Indicators, GPFI, see:
http://www.gpfi.org/sites/default/files/G20%20Set%20of%20Financial%20Inclusion%20Indicators.pdf
246
End Notes
290
Demirguc-Kunt & Klapper (2012).
The vision statement refers measuring density of formal credit providers per 10,000 people.
However, given the possible variation in the spread of the reference population of 10,000, it is
important to combine area and density. The referred benchmark (25 sq. KM with population of 10,000
or more), however, is kept less conservative than the average measure.
292
Source: Australia FOS Annual Report, 2012-13, see:
http://www.fos.org.au/centric/home_page/publications/annual_review.jsp
293
One example of this approach is the FSP (Financial Services for the Poor) Maps produced by the
Gates Foundation, see: http://fspmaps.com/
294
Source: AsiaPop, see:
http://www.worldpop.org.uk/data/summary/?contselect=Asia&countselect=India&typeselect=Populati
on
295
Source: CMIE Consumer Pyramids, see: http://www.consumer-pyramids.com/
296
For making precise & robust estimates at the district level, a large sample size is required (e.g. the
District Level Household and Facility Survey (DLHS-3) undertaken by the Ministry of Health and Family
Welfare, Govt. of India sampled approximately 7,20,000 households for generating district level
estimates on health outcomes), which necessitates employing great deal of financial and human
resources. However, it is possible to derive reliable district level estimates from a sample similar to
the size of NSSO (which produces robust state level estimates) based on Small Area Estimation (SAE)
technique as mentioned in Chandra et al, 2010. The SAE technique uses auxiliary information available
at the district level (from the Census and other sources) and utilises a model based approach to
estimate the district level statistics from the state level representative sample such as the NSSO.
291
247